Does financial development has (a)symmetric effect on environmental quality: insights from South Africa

Abstract

PurposeThis paper investigates the (a)symmetric effects of financial development in the presence of economic growth, energy consumption, urbanization and foreign direct investment on environmental quality of South Africa between 1980 and 2017.Design/methodology/approachA robust measure of financial development is generated using banking institutions and non-banking institutions market-based financial development indicators, while environmental quality is measured using carbon footprint, non-carbon footprint and ecological footprint. The objectives of the study are captured using linear and non-linear autoregressive distributed lag.FindingsThe result from the symmetric analysis suggests that financial development stimulates carbon footprint and ecological footprint in the short run; however, financial development abates non-carbon footprint. In the long run, financial development has a significant negative effect on carbon footprint and ecological footprint. However, the asymmetric analysis established strong asymmetric effect in the short run, while no asymmetric effect is found in the long run. The short run asymmetric analysis reveals that positive shock in financial development increases carbon footprint and ecological footprint; however, positive changes in financial development reduce non-carbon footprint. Negative shocks in financial development, on the other hand, have a positive impact carbon footprint, non-carbon footprint and ecological footprint.Practical implicationsThe study's outcome implies that the concept of “more finance, more growth” could also be applied to “more finance, better environment” in South Africa. The study offers vital policy suggestions for the realization of sustainable development in South Africa.Originality/valueThis empiric adds to the body of knowledge on the influence of financial development on various components of environmental quality (carbon footprint, non-carbon footprint and ecological footprint) in South Africa.