Exchange rate and energy demand in G7 countries: Fresh insights from Quantile ARDL model

The empirical literature examines the effect of exchange rate on energy demand. However, the existing literature fails to investigate the effect during different states of energy demand, that is, when energy demand is relatively high and when it is quite low. We extend the prior literature by examining the effect of exchange rates on various states of energy demand in G7 countries. We use the Quantile ARDL (QARDL) model and compare its results with standard ARDL and nonlinear ARDL models. In addition, we use the Granger causality in Quantile (GCQ) test for robustness purposes. The standard ARDL and nonlinear ARDL estimates show that cointegration exists in the context of France only. In contrast, QARDL estimates support cointegration in all sample countries. Moreover, the QARDL estimates indicate that the short-run and long-run effect varies across various quantiles of the energy demand, suggesting different policy implications during different states of the energy demand. Finally, GCQ estimates suggest that the exchange rate causes energy demand across various quantiles of the exchange rate and energy demand. In contrast, energy demand does not cause exchange rate at most quantiles. These findings indicate that devising policies without considering the different states of energy demand may lead to unfavourable consequences.