Exchange rate volatility and green growth in China: does nonlinearity matter?

Green growth means decoupling economic growth and carbon footprints, and its role cannot be overlooked in attaining sustainable development objectives. The exchange rate is a key macroeconomic variable that has impacted almost every sector of the economy; thus, understanding the nexus between exchange rate volatility and green growth is important. To date, no empirical study has estimated the asymmetric impact of exchange rate volatility on green growth in China. This analysis fills the gap by estimating how green growth responds to asymmetric exchange rate volatility. To that end, the analysis employs linear and nonlinear autoregressive distributed lag (ARDL) estimators. The linear model findings reveal that exchange rate volatility hurt green growth in the long-run. On the other hand, the nonlinear model shows that a rise in exchange rate volatility hinders green growth in the short and long run, while a lower level of volatility does not significantly impact green growth. In addition, green investment, human capital, environmental technology, and financial development promote long-run green growth in both linear and nonlinear models. The policymakers in China should focus on the development of a robust forex market that can control the volatility of the renminbi against other currencies.