Revisiting the Role of Fiscal Policy, Financial Development, and Foreign Direct Investment in Reducing Environmental Pollution during Globalization Mode: Evidence from Linear and Nonlinear Panel Data Approaches

Abstract

Fiscal policy is a crucial government tool for influencing and managing the national economy and creating a strong incentive for low carbon investment. Previous literature has reputable evidence that improving fiscal policy enhances environmental quality. However, the literature fails to classify the exact turning level (threshold point) below/above which the association may be negative or positive. In this regard, this research investigates the nexus between fiscal policy, foreign direct investment, financial development, trade openness, urban population, gross capital formation, labour force, and CO2 emissions in the era of globalization. The panel data set contained 105 countries over the period from 1990 to 2016. The empirical findings are estimated through linear and nonlinear panel data approaches such as fully modified ordinary least square and panel threshold regression. The subsequent findings are established: first, fiscal policy and globalization significantly increase environmental pollution. Second, the empirical results confirm the existence of the pollution haven hypothesis (PHV). Third, financial development and gross fixed capital formation are also considered some of the most crucial indicators to increase pollution levels. Fourth, trade openness, urban population, and labour force improve environmental quality. Fifth, panel threshold regression discovers that countries maintain a minimum level of fiscal policy at −1.2889. Based on these empirical findings, this study suggests that policymakers and governments of these countries should take steps to restructure their industrial sector and design macroeconomic-level carbon-free policies to support the implementation of low-energy-intensive and lower carbon production technologies.