How effective are trade policy and monetary policy in achieving a pathway to sustainable development? Evidence from a wavelet quantile‐on‐quantile Granger causality analysis

Abstract

The paper explores the impact of trade policy (TRP) and monetary policy (MP) on CO2 emissions in the United States over the period February 1, 1988–December 12, 2022. The study employed wavelet quantile‐on‐quantile regression (WQQR) to explore the relationship across different quantiles and time‐scales. Furthermore, the present study introduced wavelet quantile‐on‐quantile Granger causality (WQQGC) to explore the predictive power of the independent variable over the dependent variable with a focus on different time‐scales and quantiles. The use of wavelet quantile‐based tools is supported by the nonlinear and non‐normal distribution of the variables. The results from WQQR show that in the short and medium term, an increase in renewable energy consumption (REC) in the United States is accompanied by an increase in CO2 emissions. However, in the long term, across all quantiles, REC effectively reduces CO2. In the short and medium term, the negative impact of TRP on CO2 emissions is apparent; however, we observed a supportive positive effect of TRP on reducing CO2 emissions in the long term. Across all periods, the influence of MP on CO2 emissions is generally weak yet positive; however, there are instances of negative associations. Across all quantiles in the short term, the impact of natural gas on CO2 emissions remains positive, although this positive effect diminishes in the long term. Finally, all the regressors can significantly predict CO2 emissions at dissimilar quantiles and time‐scales. The study formulates Sustainable Development Goals policies based on the above findings.