Interactions among macroeconomic policies, the energy market and environmental quality

This paper provides an empirical examination on the interactions among macroeconomic policies, the energy market and environmental quality. The analysis is conducted for two non-EMU countries, Switzerland and the United Kingdom, over the period 1990–2016. We propose two distinct VAR models based on a macroeconomic framework including the energy market. The study evaluates the dynamic effects of shocks to fiscal and monetary policy on the energy market and environmental quality. We identify four policy shocks: (i) government consumption (ii) public investment (iii) the official bank policy rate (iv) the central bank’s reserve assets. The empirical analysis reveals that fiscal and monetary policies have a significant influence on the energy market and environmental quality. Our findings indicate that fiscal policy, besides its primary role in stabilizing economic activity, can contribute to achieving non-renewable energy conservation and enhancing environmental quality. On the other hand, the examination of monetary policy reveals that central banks should investigate the impact of their interventions on the energy market and incorporate environmental issues in their welfare maximization problem.