Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?

By Laurent Millischer, Chenxu Fu, Ulrich Volz, John Beirne

May 31, 2024

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Laurent Millischer, Chenxu Fu, Ulrich Volz, and John Beirne. Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?, (USA: International Monetary Fund, 2024) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This study investigates the relationship between the adoption of renewable energy and the sensitivity of inflation to changes in fossil energy prices across 69 countries over a 50-year period from 1973 to 2022. In the wake of recently increased oil and gas prices leading to a surge in inflation, the notion of a “divine coincidence” suggests that higher levels of renewable energy adoption, in addition to fighting climate change, could mitigate fossil fuel price-induced inflation volatility. Confirming the divine coincidence hypothesis could be an argument in favor of greening monetary policy. However, our empirical results are inconsistent with the hypothesis as we find no evidence that increased renewable energy adoption reduces the impact of fossil fuel price changes on energy inflation rates. This counter-intuitive result may be attributed to idiosyncratic national energy policies, potential threshold effects, or trade linkage spillovers. As the world continues transitioning towards a low-carbon economy, understanding the implications of this shift on inflation dynamics is crucial.

Subject: Consumption, Energy pricing, Environment, Expenditure, Fuel prices, Inflation, National accounts, Prices, Renewable energy

Keywords: Consumption, Electricity price inflation, Energy inflation, Energy Prices, Energy pricing, Fuel prices, Global, Inflation, Inflation dynamics, Inflation expectation, Inflation sensitivity, Inflation volatility, Monetary Policy, Oil Price, Renewable Energy, Share of renewable

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/111
Stock No:

WPIEA2024111
ISBN:

9798400277566
ISSN:

1018-5941

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