Non-linear analysis of effects of energy consumption on economic growth in China: Role of real exchange rate

Abstract In this study, we developed a simple economic growth model with energy consumption, wherein the fluctuations of the real exchange rate may produce uncertainty in the nexus of energy use and economic growth. Then, using a two-regime threshold model with smooth transition and Chinese data from 1980 to 2017, we empirically confirmed that the effects of the total consumption and that of the three energy sources on economic growth are nonlinear when exchange rate changes are included. Our results are robust by introducing variables and alternative real exchange rate measures. In particular, it reveals that oil consumption is more sensitive to the exchange rate volatility. Our conclusions also imply that in an economy that relies on energy consumption, real exchange rate fluctuations with structural breaks have a nonlinear impact on economic growth, and the devaluation of domestic currency does not necessarily play a role in promoting economic growth.