Impacts of renewable energy consumption on the German economic growth: Evidence from combined cointegration test

Abstract

Germany is the largest economy in Europe and the leading renewable energy user comparable to none in the entire of the European continents. It is in reference to these developments that this study investigates whether the impacts of renewable energy have consolidated the economic growth prospects of the country. To ensure this, quarterly time series data from 1971Q1 to 2013QIV was used. The study employed the Clemente-Montanes-Reyes detrended structural break test, the Bayer-Hanck combined cointegration test and the ARDL bounds testing approach to cointegration. In addition, the causality analysis was observed using VECM Granger causality framework. The results confirmed the existence of cointegration among the variables. The results show that renewable energy consumption in Germany consolidates the country's economic growth prospects to the extend that a 1% increase in renewable energy consumption boosts German economic growth by 0.2194%. In addition to that, a 1% increase in capital lead to the rise in economic growth by 1.1320%. While a 0.5125% increase in economic growth is due to 1% increase in labor productivity. The causality analysis on the other hand, revealed the existence of feedback effect between renewable energy consumption and economic growth. While the relationship between renewable energy consumption and capital is found to be bidirectional and same inference was found to exist between capital and economic growth. The study proposes solid mechanisms that will help in averting renewable energy market failure locally and internationally among others.