The financial sector expansion effect on renewable electricity production: case of the BRICS countries

This purpose of the research is to determine the financial expansion index effect on renewable electricity production for Brazil, Russia, India, China, and South Africa (BRICS countries) from 1995 to 2015. Principal component analysis is applied to generate a bank-based and stock market-based index of financial expansion. The article uses three recently developed estimators, namely Mean Group, Augmented Mean Group, and Common Correlated Effects Mean Group Estimators. The empirical results showed that there is no evidence of inverse U-shaped impacts of financial expansion index on renewable electricity production. The results demonstrate that the financial expansion index has a positive influence on renewable electricity production in total, including and excluding the hydroelectricity for the panel of BRICS countries; a larger effect was observed when non-hydropower renewable electricity was considered. The Dumitrescu–Hurlin (DH) causality test outcomes represent that there are one-way causalities running from the financial expansion index to hydroelectricity and the financial expansion index to the production of sustainable electricity in total. Therefore, the production of renewable electricity in total and hydroelectricity are driven by financial expansion. However, there is a one-way causation moving from the production of renewable electricity from non-hydropower to financial expansion, which shows that the latter is driven by an increase in renewable non-hydroelectricity. Policy implications are provided at the end of this study.