Unpacking Mundell‐Fleming Trilemma Tradeoffs: Asymmetric Pathways to Energy Diversification

ABSTRACT Optimal economic and monetary policies provide a strategic framework for guiding renewable energy investment and transformation. This study explores the relationship between Mundell‐Fleming trilemma tradeoffs and renewable energy diversification through the lens of the “impossible trinity” hypothesis. Analyzing a comprehensive dataset spanning 70 countries from 1996 to 2019, we introduce a novel measure of energy diversification. Employing advanced panel quantile regression techniques with non‐additive fixed effects, our research reveals compelling insights into the role of trilemma tradeoffs. The findings demonstrate that monetary unions emerge as a powerful catalyst for renewable energy diversification, while fully flexible exchange rate regimes and financially closed systems function as significant barriers to sustainable energy transitions. The positive impact of monetary unions and the corresponding negative influences of alternative policy approaches are most pronounced in countries characterized by high energy import dependence, substantial debt burdens, limited natural resources, and elevated energy efficiency. Notably, flexible exchange rate regimes show potential in promoting energy diversification for countries with low energy imports, particularly after achieving a certain diversification threshold. The research fundamentally suggests that monetary union represents the optimal trilemma policy configuration for promoting renewable energy diversification, even amid economic uncertainties. By highlighting the critical importance of simultaneous financial openness and exchange rate stability, this study provides strategic guidance for policymakers seeking to enhance energy security and facilitate smoother, more resilient energy transitions.