PurposeMotivated by the conflicting evidence on the effect of financial development on environmental quality, this study investigates the moderating role of institutional quality in the link between financial development and environmental quality using a robust proxy in Malaysia from 1984 to 2017.Design/methodology/approachEcological footprint is used to measure environmental quality, while financial development is proxied using three measures (domestic credit provided by the private sector, domestic credit provided by the financial sector and domestic credit provided by the banking sector). An index of institutional quality is generated from voice and accountability, government effectiveness, regulatory quality, rule of law and control of corruption. Autoregressive Distributed Lag Bounds Test, Fully Modified Ordinary Least Square and Canonical Cointegrating Regression were used as the estimation techniques.FindingsThe results show that financial development, institutional quality, economic growth and foreign direct investment improve environmental quality in the short run, whereas trade openness and natural resources worsen it. In the long run, financial development, institutional quality, economic growth, trade openness and natural resources deteriorate the environment. Furthermore, findings from the interactive term suggest that institutions and financial development complement each other to affect the environment in the short run. However, institutions and financial development perform a substitutability role in influencing the environment in the long run.Practical implicationsThe outcome of this study suggests that there are time lags in the relationship between institutional quality, financial development and ecological footprint in Malaysia. Furthermore, the study offers important policy implications to policymakers in Malaysia and other developing countries on how to mitigate environmental degradation.Originality/valueThis study contributes to the body of knowledge on the moderating role of institutional quality in the relationship between financial development and ecological footprint in Malaysia. It examines the direct and indirect effects of financial development on environmental degradation through institutional quality, which have received less attention in the context of Malaysia. The findings from this study are robust to different proxies and estimation techniques.
This study deviates from extant studies by examining the effect of shadow economy (SE) on environmental pollution, and the role institutional indicators play in moderating the effect in West Africa between 1992 and 2015. Specifically, the study employed three institutional indicators (corruption control [COR], law and order [LAW], and bureaucratic quality [BUQ]) to mediate the effect and also determine its threshold values. SE is measured using Multiple Indicators Multiple Causes (MIMIC) while environmental pollution is proxy by carbon dioxide (CO2) per capita. Two step system Generalized Method of Moments (GMM) is used to drive out the conclusions of the study. The findings reveal that SE, COR and LAW contribute significantly to environmental pollution, while BUQ though not significant, reduces environmental pollution in the region. Further, the interactive effect of SE with all the institutional indicators shows that strong institutional indicators abate environmental pollution through reduction in the presence of SE. The threshold value of institutional indicators, which reduces SE and abates environmental pollution, are 3.8 and 3.7 for COR, and LAW, respectively, on an ordinary scale of 0–6, while 2.8 for BUQ on an ordinary scale of 0–4. Nevertheless, most of the countries in the region operate below the threshold level of institutional indicators in the region. The results are robust to different proxies of environmental pollution. The implications of the study are discussed.
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