Electricity Prices, Technology, Productivity, And Environmental Degradation: Implications For Financial Stability

Abstract

The limited availability of fossil fuels and the financial pressure they create for countries that do not have the resources have led countries to search for new energy sources. In particular, renewable energy sources and therefore electrical energy obtained from these sources have been proposed in the literature as an alternative to fossil fuels. Thus, this study investigates the impact of electricity prices on financial stability in European Union countries from 2010 to 2021 using Driscoll Kraay fixed effects estimation. Financial stability is measured using the bank z-score, while productivity-intensive technology, environmental quality, and economic growth are included as control variables. The findings indicate that an increase in electricity prices negatively affects the bank z-score. In contrast, productivity-intensive technology positively impacts the bank z-score. Similarly, environmental quality contributes to an increase in the bank z-score. Additionally, economic growth enhances financial stability. Considering that rising electricity prices negatively affect financial stability, policymakers should encourage companies to produce electricity from renewable sources, such as solar panels or wind turbines. This can be supported through incentives such as tax breaks or low-cost financing for firms investing in on-site renewable energy systems. In this way, electricity price fluctuations will have less impact on companies and, in turn, help protect financial stability.

Keywords

• Financial Stability
• Electricity Prices
• Productivity Intensive Technology
• Bank z-score
• Economic Growth

References

1. Alamgir, F., & Amin, S. B. (2021). The nexus between oil price and stock market: Evidence from South Asia. Energy Reports, 7, 693–703. https://doi.org/10.1016/j.egyr.2021.01.027 google scholar
2. Ang, T.-Z., Salem, M., Kamarol, M., Das, H. S., Nazari, M. A., & Prabaharan, N. (2022). A comprehensive study of renewable energy sources: Classifications, challenges and suggestions. Energy Strategy Reviews, 43, 100939. doi: 10.1016/j.esr.2022.100939 google scholar
3. B., A., & Paul, S. (2021). Oil shocks and stock market: Revisiting the dynamics. Energy Economics, 96, 105111. doi: 10.1016/j.eneco.2021.105111 google scholar
4. Bahrini, R., & Qaffas, A. A. (2019). Impact of Information and Communication Technology on Economic Growth: Evidence from Developing Countries. Economies, 7(1), 21. https://doi.org/10.3390/economies7010021 google scholar
5. Baltagi, B. H., & Wu, P. X. (1999). Unequally Spaced Panel Data Regressions with AR(1) Disturbances. Econometric Theory, 15(6), 814–823. google scholar
6. Bayar, Y., Borozan, D., & Gavriletea, M. D. (2021). Banking sector stability and economic growth in post‐transition European Union countries. International Journal of Finance & Economics, 26(1), 949–961. https://doi.org/10.1002/ijfe.1829 google scholar
7. Bayraktar, Y., Aydin, S., Çakır, M. A., Recepoğlu, M., Ozyilmaz, A., Buyukakin, F., & Çakır, S. (2024). Consequences of Information and Communication Technologies and Environmental Degradation on Health Expenditure. INQUIRY: The Journal of Health Care Organization, Provision, and Financing, 61, 00469580241277449. https://doi.org/10.1177/00469580241277449. google scholar
8. Bernanke, B. S., Gertler, M., Watson, M., Sims, C. A., & Friedman, B. M. (1997). Systematic Monetary Policy and the Effects of Oil Price Shocks. Brookings Papers on Economic Activity, 1997(1), 91. https://doi.org/10.2307/2534702 google scholar

9. Bhargava, A., Franzini, L., & Narendranathan, W. (1982). Serial Correlation and the Fixed Effects Model. The Review of Economic Studies, 49(4), 533–549. https://doi.org/10.2307/2297285 google scholar
10. Breusch, T. S., & Pagan, A. R. (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics. The Review of Economic Studies, 47(1), 239. https://doi.org/10.2307/2297111 google scholar
11. Chiaramonte, L., Liu, F. Hong, Poli, F., & Zhou, M. (2016). How Accurately Can Z‐score Predict Bank Failure? Financial Markets, Institutions & Instruments, 25(5), 333–360. https://doi.org/10.1111/fmii.12077 google scholar
12. Chien, F., Sadiq, M., Kamran, H. W., Nawaz, M. A., Hussain, M. S., & Raza, M. (2021). Co-movement of energy prices and stock market return: Environmental wavelet nexus of COVID-19 pandemic from the USA, Europe, and China. Environmental Science and Pollution Research, 28(25), 32359–32373. doi: 10.1007/s11356-021-12938-2 google scholar
13. Cuestas, J. C., Monfort, M., & Ordóñez, J. (2024). Gas price shocks, the current account, and the real exchange rate: An empirical analysis for the EU. Finance Research Letters, 60, 104840. doi: 10.1016/j.frl.2023.104840 google scholar
14. Cuñado, J., & Pérez De Gracia, F. (2003). Do oil price shocks matter? Evidence for some European countries. Energy Economics, 25(2), 137–154. doi: 10.1016/S0140-9883(02)00099-3 google scholar
15. Danisman, G. O., & Tarazi, A. (2020). Financial inclusion and bank stability: Evidence from Europe. The European Journal of Finance, 26(18), 1842–1855. doi: 10.1080/1351847X.2020.1782958 google scholar
16. Dave, P., Wadhwa, V., Aggarwal, S., & Seetharaman, A. (2013). The Impact of Research and Development on the Financial Sustainability of Information Technology (IT) Companies Listed on the S&P 500 Index. Journal of Sustainable Development, 6(11), p122. doi: 10.5539/jsd.v6n11p122 google scholar
17. Demirer, R., Ferrer, R., & Shahzad, S. J. H. (2020). Oil price shocks, global financial markets and their connectedness. Energy Economics, 88, 104771. doi: 10.1016/j.eneco.2020.104771 google scholar
18. Doruk, Ö. T. (2024). The link between electricity consumption and stock market during the pandemic in Türkiye: A novel high-frequency approach. Environmental Science and Pollution Research, 31(11), 17311–17323. https://doi.org/10.1007/s11356-024-32155-x google scholar
19. Driscoll J., & Kraay A. (1998). Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data. The Review of Economics and Statistics, 80(4), 549–560. google scholar
20. Emara, N., & El Said, A. (2021). Financial inclusion and economic growth: The role of governance in selected MENA countries. International Review of Economics & Finance, 75, 34–54. doi: 10.1016/j.iref.2021.03.014 google scholar
21. European Central Bank. (2022). Financial Stability Review. https://www.ecb.europa.eu/pub/pdf/fsr/ecb.fsr202211~6383d08c21.pl.pdf google scholar
22. European Commission. Directorate General for Energy., Trinomics., Schoenherr., Fraunhofer ISI., & Enerdata. (2024). Study on mapping of regulatory frameworks and barriers for individual and collective renewables self-consumption in EU Member States. Publications Office. https://data.europa.eu/doi/10.2833/172166 google scholar
23. European Commission. Statistical Office of the European Union. (2023). Sustainable development in the European Union: Statistical annex to the EU voluntary review : 2023 edition. Publications Office. https://data.europa.eu/doi/10.2785/97840 google scholar
24. European Commission. Statistical Office of the European Union. (2024). Renewables take the lead in power generation in 2023. https://ec.europa.eu/eurostat/web/products-eurostat-news/w/ddn-20240627-1 google scholar
25. Evgenidis, A. (2018). Do all oil price shocks have the same impact? Evidence from the euro area. Finance Research Letters, 26, 150–155. doi: 10.1016/j.frl.2017.12.013 google scholar
26. Gramlich, E. M. (1979). Macro Policy Responses to Price Shocks. Brookings Papers on Economic Activity, 1979(1), 125. https://doi.org/10.2307/2534306. google scholar
27. Hadri, K., & Kurozumi, E. (2012). A simple panel stationarity test in the presence of serial correlation and a common factor. Economics Letters, 115(1), 31–34. https://doi.org/10.1016/j.econlet.2011.11.036 google scholar
28. Hausman, J. A. (1978). Specification Tests in Econometrics. Econometrica, 46(6), 1251–1271. https://doi.org/10.2307/1913827 google scholar
29. Herman, R., Nistor, C., & Jula, N. M. (2023). The Influence of the Increase in Energy Prices on the Profitability of Companies in the European Union. Sustainability, 15(21), 15404. doi: 10.3390/su152115404 google scholar
30. Herrera, A. M., Karaki, M. B., & Rangaraju, S. K. (2019). Oil price shocks and U.S. economic activity. Energy Policy, 129, 89–99. https://doi.org/10.1016/j.enpol.2019.02.011 google scholar
31. Holman, R., & Lefort, J. S. (2024). Invested in renewables. The Only Way Forward. https://www.eib.org/en/essays/europe-energy-transition-renewable google scholar
32. Horobet, A., Vrinceanu, G., Popescu, C., & Belascu, L. (2019). Oil Price and Stock Prices of EU Financial Companies: Evidence from Panel Data Modeling. Energies, 12(21), 4072. https://doi.org/10.3390/en12214072 google scholar
33. IEA. (2023). World Energy Outlook 2023. IEA. https://www.iea.org/reports/world-energy-outlook-2023 google scholar
34. Ijaz, S., Hassan, A., Tarazi, A., & Fraz, A. (2020). LINKING BANK COMPETITION, FINANCIAL STABILITY, AND ECONOMIC GROWTH. Journal of Business Economics and Management, 21(1), 200–221. https://doi.org/10.3846/jbem.2020.11761 google scholar
35. Jarrett, U., Mohaddes, K., & Mohtadi, H. (2019). Oil price volatility, financial institutions and economic growth. Energy Policy, 126, 131–144. https://doi.org/10.1016/j.enpol.2018.10.068 google scholar
36. Jima, M. D., & Makoni, P. L. (2023). Causality between Financial Inclusion, Financial Stability and Economic Growth in Sub-Saharan Africa. Sustainability, 15(2), 1152. https://doi.org/10.3390/su15021152 google scholar
37. Khan, M., & Yoon, S.-M. (2021). Financial instability and environmental degradation: A panel data investigation. Applied Economics, 53(54), 6319–6331. doi: 10.1080/00036846.2021.1937508 google scholar
38. Khan, S., Akbar, A., Nasim, I., Hedvičáková, M., & Bashir, F. (2022). Green finance development and environmental sustainability: A panel data analysis. Frontiers in Environmental Science, 10, 1039705. https://doi.org/10.3389/fenvs.2022.1039705 google scholar
39. Labandeira, X., Labeaga, J. M., & López-Otero, X. (2017). A meta-analysis on the price elasticity of energy demand. Energy Policy, 102, 549–568. https://doi.org/10.1016/j.enpol.2017.01.002 google scholar
40. Lee, C.C., & Lee, C.C. (2022). How does green finance affect green total factor productivity? Evidence from China. Energy Economics, 107, 105863. doi: 10.1016/j.eneco.2022.105863 google scholar
41. Li, Y., & Solaymani, S. (2021). Energy consumption, technology innovation and economic growth nexuses in Malaysian. Energy, 232, 121040. https://doi.org/10.1016/j.energy.2021.121040 google scholar
42. Magazzino, C., Shahbaz, M., & Adamo, M. (2023). On the relationship between oil market and European stock returns. Environmental Science and Pollution Research, 30(59), 123452–123465. doi: 10.1007/s11356-023-31049-8. google scholar
43. Minsky, H. P. (1992). The Financial Instability Hypothesis. The Jerome Levy Economics Institute of Bard College. https://www.levyinstitute.org/wp-content/uploads/2024/02/wp74.pdf google scholar
44. Nadeem, M. A., Jiao, Z., Nawaz, K., & Younis, A. (2020). Impacts of Voice and Accountability upon Innovation in Pakistan: Evidence from ARDL and Maki Cointegration Approaches. Mathematical Problems in Engineering, 2020, 1–18. https://doi.org/10.1155/2020/6540837 google scholar
45. Olayungbo, D. O., Zhuparova, A., Al-Faryan, M. A. S., & Ojo, M. S. (2024). Global oil price and stock markets in oil exporting and European countries: Evidence during the Covid-19 and the Russia-Ukraine war. Research in Globalization, 8, 100199. doi: 10.1016/j.resglo.2024.100199 google scholar
46. Paramati, S. R., Shahzad, U., & Doğan, B. (2022). The role of environmental technology for energy demand and energy efficiency: Evidence from OECD countries. Renewable and Sustainable Energy Reviews, 153, 111735. doi: 10.1016/j.rser.2021.111735 google scholar
47. Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.572504 google scholar
48. Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross‐section dependence. Journal of Applied Econometrics, 22(2), 265–312. https://doi.org/10.1002/jae.951 google scholar
49. Sahay, R., Eriksson von Allmen, U., Lahrèche-Révil, A., Khera, P., Ogawa, S., Bazarbash, M., & Beaton, K. (2020). The promise of Fintech: Financial inclusion in the post COVID-19 era. International Monetary Fund. google scholar
50. Saif-Alyousfi, A. Y. H., Saha, A., Md-Rus, R., & Taufil-Mohd, K. N. (2021). Do oil and gas price shocks have an impact on bank performance? Journal of Commodity Markets, 22, 100147. https://doi.org/10.1016/j.jcomm.2020.100147 google scholar
51. Schwartz, A. J. (1995). Why Financial Stability Despends on Price Stability. Economic Affairs, 15(4), 21–25. doi: 10.1111/j.1468-0270.1995.tb00493.x google scholar
52. Shi, X., & Shen, Y. (2021). Macroeconomic uncertainty and natural gas prices: Revisiting the Asian Premium. Energy Economics, 94, 105081. doi: 10.1016/j.eneco.2020.105081 google scholar
53. Toader, E., Firtescu, B. N., Roman, A., Anton, S. G. (2018). Impact of Information and Communication Technology Infrastructure on Economic Growth: An Empirical Assessment for the EU Countries. Sustainability, 10(10), 3750. doi: 10.3390/su10103750 google scholar
54. Topalcık, O., & Kirikkaleli, D. (2024). Financial stability and environment degradation in Turkey: Evidence from fourier ARDL approach. Frontiers in Environmental Science, 12, 1420019. doi: 10.3389/fenvs.2024.1420019 google scholar
55. UN. (1974). WORLD ECONOMIC SURVEY, 1973, Part Two. Current Economic Developments. https://www.un.org/en/development/desa/policy/wess/wess_archive/1973wes_part2.pdf google scholar
56. UNCTAD (Ed.). (2023). Technology and Innovation Report 2023 Opening Green Windows: Technological Opportunities for a Low-carbon World. United Nations. google scholar
57. Westerlund J., & Edgerton D. L. (2007). A panel bootstrap cointegration test. Economics Letters, 97(3), 185–190. https://doi.org/10.1016/j.econlet.2007.03.003 google scholar
58. Xu, X. L., Shen, T., Zhang, X., & Chen, H. H. (2020). The role of innovation investment and executive incentive on financial sustainability in tech-capital-labor intensive energy company: Moderate effect. Energy Reports, 6, 2667–2675. https://doi.org/10.1016/j.egyr.2020.09.011 google scholar
59. Yerdelen Tatoğlu, F. (2016) Panel Veri Ekonometrisi. Beta Yayınları. google scholar
60. Zhen, Z., Ullah, S., Shaowen, Z., & Irfan, M. (2023). How do renewable energy consumption, financial development, and technical efficiency change cause ecological sustainability in European Union countries? Energy & Environment, 34(7), 2478–2496. https://doi.org/10.1177/0958305X221109949. google scholar