Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?

IMF Working Papers, May 31, 2024

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Investigates the relationship between the adoption of renewable energy and the sensitivity of inflation to changes in fossil energy prices.
Sample: 69 countries over a 50-year period from 1973 to 2022.
Motivation: Recent increases in oil and gas prices and a surge in inflation prompted examination of a “divine coincidence” hypothesis—higher renewable adoption could reduce fossil-fuel-price-induced inflation volatility and support arguments for greening monetary policy.

No evidence that increased renewable energy adoption reduces the impact of fossil fuel price changes on energy inflation rates.

The counter-intuitive empirical result suggests the transition to a low-carbon economy has complex implications for inflation dynamics.
Understanding these implications remains crucial for policymakers considering interactions between energy policy, fiscal and monetary frameworks, and inflation outcomes.

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

Laurent Millischer, Chenxu Fu, Ulrich Volz, and John Beirne; May 31, 2024.