Navigating Macroeconomic Shocks and Energy Vulnerability: Pathways Toward Sustainable Energy and <scp>SDG</scp> 7 in Developing Economies

Abstract

ABSTRACT A well‐established body of literature examines how energy market dynamics translate into macroeconomic instability. However, the reverse relationship remains largely overlooked, particularly in low‐income settings. This omission is especially consequential in developing economies, where persistent macroeconomic volatility directly constrains households' capacity to secure affordable energy. Against this backdrop, the study examines both the linear and non‐linear effects of macroeconomic instability on energy vulnerability in low and middle‐income countries. The generalised method of moments is used to address the issue of endogeneity, based on data from 90 countries covering the period 2000–2023. The findings indicate that energy vulnerability in these countries is exacerbated by the non‐linear impact of macroeconomic instability, particularly when market volatility doubles. In contrast, no evidence is found to suggest that linear macroeconomic instability worsens energy vulnerability. Additionally, these effects are more pronounced in the period before the 2007–2009 financial crisis. In the aftermath of the financial crisis, both linear and non‐linear macroeconomic instability were found to increase energy vulnerability. After analysing various indicators of macroeconomic instability across different markets, similar patterns are observed in the labour market, goods and services market, and money market. However, the exchange markets presented both worsening linear and non‐linear impacts on energy vulnerability. These findings are consistent across Africa and low‐ to middle‐income economies in North America; however, South American countries displayed different trends, where macroeconomic fluctuations did not seem to worsen vulnerability in the energy sector. Policy discussions are extensive.