The triple threat: unpacking the interplay between inflation, government expenditure, energy efficiency, and environmental pollution

Abstract

This study investigates the relation and Granger causality among inflation, fiscal expenditure, energy consumption, economic growth, energy efficiency, renewable energy consumption, and environmental pollution in the G7 countries utilizing the PLSTRVAR model for 1975–2022. Our findings highlight the results that inflation and fiscal expenditure have impact on environmental pollution across different regimes. On the other hand, unlike some studies in the literature, it emphasizes that renewable energy consumption may have pollution-increasing effects on environmental pollution. In the context of PLSTRVAR-GC results, it determines that the selected variables are the Granger cause of environmental pollution. However, within the framework of the direction of Granger causality, the results differ between regimes and variables. Notably, the causality analysis reveals a bidirectional causality between energy policy; energy efficiency and renewable energy, and environmental pollution in both regimes, while a unidirectional causality from inflation and fiscal expenditure to environmental pollution. These insights underscore the necessity for governments to adeptly balance fiscal policy, inflation control, and environmental pollution. Policymakers are thus challenged to implement fiscal measures that simultaneously stimulate economic growth, manage inflation, and support the transition to a low-carbon economy, thereby reducing CO₂ emissions.