Mitigating energy instability: The influence of trilemma choices, financial development, and technology advancements

This research investigates the applicability of the renowned “impossible trinity” hypothesis within the context of energy instability, contributing a unique perspective to the relevant literature. Through asymmetrical analysis of the optimal trilemma policy choices aimed at mitigating energy volatility, we dissect energy instability into three dimensions: consumption, generation, and price volatility. Utilizing a generalized panel quantile regression approach, the study leverages an unbalanced panel dataset encompassing 184 countries over the period from 1969 to 2022. Empirical findings demonstrate that financial openness (FOP) emerges as a potent individual mitigator of energy instability, particularly at higher quantiles, outperforming both monetary policy independence (MPI) and exchange rate stability (ERS). Conversely, a closed financial system (ERS and MPI) provides partial mitigation, while a fully flexible exchange rate regime (MPI and FOP) offers comprehensive alleviation of energy instability. The results underscore the contrasting roles of financial development, which exacerbates energy volatility, as well as technology development, which acts as a mitigating factor. Importantly, the interactions of financial development and technological development with trilemma policies yield varying effects on energy instability. Policymakers should thus prioritize a fully flexible exchange rate regime to enhance energy stability, especially during times of uncertainty, and consider the intricate correlations among financial, technological, and trilemma policy factors for effective energy stability management.