Beyond the target: How do monetary policies affect energy poverty?

Abstract

Monetary policies are essential levers used by central banks to regulate the economy by adjusting the money supply and interest rates, with the aim of controlling inflation, among other things. Although their primary goal is usually to stabilize the overall economy, they have far-reaching effects on energy. This paper proposes a preliminary analysis of the impact of monetary policy on energy poverty in 122 developing countries over the period 2000–2021. Using the instrumental variable method and central bank independence as instrument of monetary policy, findings show that expansionary monetary policies, such as increasing the money supply, increase access to electricity and therefore reduce energy poverty. Second, the effect varies depending on the initial level of energy poverty and across different regions, with expansionary monetary policies reducing energy poverty in only three of the six considered regions, but increasing it in sub-Saharan Africa. The mediation analysis shows that monetary policy reduces energy poverty through investment, economic growth, and energy price channels. In terms of practical policy recommendations, central banks can impact energy access by implementing targeted initiatives such as low-interest financing for renewable energy, pro-poor investment, and inflation targeting that takes into account the regressive consequences of energy price volatility.