Does Financial Development influence Environmental Quality? Evidence from Emerging and Developing Countries

Abstract

Abstract The paper aims to investigate the impact of financial development (FD), and other control variables on environmental quality. The sample incorporates fifty emerging and developing countries from 1980 to 2020. The pooled mean group/auto regressive distributed lag (PMG/ARDL) technique is used to estimate variables. Prior estimate the model, unit roots and cross section dependence tests are performed. Subsequently, second generation unit root CIPS tests for constant and trend are run for the study variables. Countries are classified into groups to determine the impact of FD, and other variables on environmental quality denoted by CO2 emissions. Dumitrescu Hurlin causality test is also performed. Results reveal a positively significant relationship between variables, and CO2 for some grouping countries in which they contribute to environmental degradation. However, there is a negatively significant relationship between study variables and CO2 for other grouping countries which involves a positive impact on enhancing environmental quality. The reasoning behind contradictory results within different groups in the study may be attributed to variability in FD levels, income levels, and other socioeconomic factors. To improve environmental quality, policymakers, authorities, and financial bodies have to focus on FD indicators that enhance environmental quality via environmentally friendly products, motivating environmentally friendly projects, eliminating polluted activities, increasing the usage of renewable energy and eliminating nonrenewable energy usage.