How does financial development affect environmental quality - Empirical evidence from 112 countries

Abstract

 Although finance is theoretically considered an important factor influencing the environmental quality, the empirical results are inconsistent. This paper examines the existence of any inverted U-shaped relationship between financial development and environmental degradation, measured by carbon emissions. The results from the system GMM estimation and semi-parametric test for a sample of 112 countries over the period 1961- 2015 can be summarized as follows. There exists an inverted U-shaped link between financial development and environmental pollution. Initially, financial development increases carbon emissions but when the former develops to a certain threshold, it becomes effective in controlling carbon emissions. Our findings provide insightful implications for policymakers in developing financial system while still protecting environment.