Renewable energy and economic growth: A Markov-switching approach

This paper examines the dynamic causal relationship between renewable energy prices and economic growth in the cases of Norway, New Zealand, and two Canadian provinces. A Markov-switching vector autoregression (MS-VAR) model is used with model parameters being governed by a hidden Markov chain, allowing the causal relationship to vary amongst different states of the economy. A unidirectional causal link, running from economic growth to renewable energy is found in the case of New Zealand, Alberta, and Ontario. The causality emerges in the cases of New Zealand and Ontario, during periods of high economic growth, whilst it materializes in the cases of Alberta during periods of low economic growth. Our empirical results document the existence of a time-dependent causal relationship between renewable-energy prices and economic growth.