Financial Development and Renewable Energy Investment in MENA Countries: A Panel DOLS and Granger Causality Approach

Abstract

This study investigates the long-run relationship and causal linkages between financial development and renewable energy investment in 10 Middle East and North Africa (MENA) countries over the period 2000–2023. Using a Panel Dynamic Ordinary Least Squares (DOLS) approach and Dumitrescu–Hurlin panel causality tests, we examine whether deeper and more liquid financial markets translate into greater renewable energy investment. The empirical results reveal a statistically significant negative long-run effect of financial development and foreign direct investment on renewable energy investment, suggesting that financial and foreign capital flows in the region remain predominantly oriented toward conventional energy sectors. Conversely, money supply exhibits a positive and significant influence, implying that domestic liquidity expansion supports renewable energy financing. The causality analysis confirms a bidirectional causal relationship between financial development and renewable energy investment, highlighting a feedback loop between the two variables. These findings suggest that aligning financial market development with renewable energy policy objectives, reorienting FDI flows toward green projects, and leveraging domestic liquidity can accelerate the energy transition in MENA economies.