The symmetric and asymmetric effect of financial development on ecological footprint in South Africa: ARDL and NARDL approach

Abstract

Introduction: The literature on the finance–emission nexus offers conflicting conclusions. This study resolves this inconsistency by investigating the symmetric and asymmetric effect of financial development on ecological footprint in South Africa, using the Environmental Kuznets Curve framework as a guide. Given the coexistence of ecological deficits and world-class financial development systems in South Africa, it is essential to explore and evaluate potential solutions to mitigating these deficits. Our empirical analysis contributes to the body of literature on the impact of financial development and ecological footprint by using a comprehensive measure of financial development and disaggregates it into its sub-indices to provide a nuanced analysis.Method: This study employs the linear auto regressive distribution lag and nonlinear auto regressive distribution lag techniques to explore the complex interactions of financial development and ecological footprint.Results and Discussion: The findings of this research indicate that financial markets and institutions seem to have varying effects on the ecological footprint. Financial market indices promote environmental quality, while financial institutions exacerbate environmental quality. These results call for policymakers to craft a watertight process that will encourage both financial markets and institutions to allocate capital to projects that are pro-environmental.