The asymmetric relationship between financial development and CO2 emissions: the case of Pakistan

Abstract

The role of financial development for the environment has been extensively debated but the empirical results largely remain inconclusive. Empirical studies generally assume symmetric relationships, which can produce biased results. This study investigates the role of asymmetries in shaping the relationship of financial development (FD) with the environment by employing nonlinear autoregressive distributed lag (NARDL) model over the period 1972-2018. The structural unit root test of Zivot and Andrews indicates that all variables are integrated of order one and bound tests confirm long run relationship between the variables. The results validate the asymmetric association between FD and the environment as CO 2 emissions are largely affected by negative shocks in FD in the short and long run. The dynamic multiplier analysis also supports the results by showing the dominance of a higher impact of a negative component of FD on carbon emissions than a positive component. This study concludes that assuming the symmetric effect of FD on CO 2 emissions might be misleading. The study suggests that the policy makers may strive to achieve high growth rates using environmentally friendly financial development. Moreover, the negative asymmetric impact of FD needs to be considered in the development of financial sector.

Financial Development, Institutional Quality, and Environmental Degradation Nexus: New Evidence from Asymmetric ARDL Co-Integration Approach

“…Moreover, FD has a positive and significant association with ED (β = 0.018294, t = 4.35973), it implies that one unit increase in FD will cause a 0.018294 unit increase in ED. Results are consistent with Ahmad and Khan [10] and Majeed and Samreen [44]. the finding emphasized that in Pakistan, the banking sector does not care about environmentally friendly investment and does not guide the investors or impose any restriction on the usage of credit on environmentally friendly technologies.…”

“…Moreover, increased FD will provide opportunities to investors to operate at a large scale that increases the profit, and they will employ more sophisticated technologies in the production process. A contrary decrease in FD will cause ED to lower because a decrease in FD decreases the availability of credit to investors and shrinks investment opportunities [44]. As a result, the production scale will decrease and lower the carbon emission that ultimately causes ED to decrease.…”

Can Financial Development Help in Raising Sustainable Economic Growth and Reduce Environmental Pollution in Pakistan? Evidence from Non Linear ARDL Model

“…Ling et al (2021) pointed out that the positive shocks in financial development significantly increase carbon emissions while the negative shocks insignificantly increase carbon emissions. In Pakistan Majeed et al (2020) examined the asymmetric impact of financial development on carbon emissions from 1972 to 2018. The NARDL approach validated that positive shocks in financial development are statistically insignificant which increase carbon emissions while the negative shocks in financial development is statistically significant which decrease carbon emissions.…”

“…There is mixed evidence regarding the relationship betweeen financial development on CO 2 emissions in Pakistan. Some studies argued that financial development has increased CO 2 emission in Pakistan Majeed et al, 2020;Ahmad et al, 2020;Raza & Shah, 2018;Shahzad et al, 2017;Siddique, 2017;Javid & Sharif, 2016;Muhammad & Ghulam, 2013;Zhang, 2011). These studies argue that the financial development help the consumers to get loans easily who prefer to buy refrigerators, motorbikes, cars, air-conditioners that emit CO 2 emissions.…”

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“…This study, which uses ecological footprint as a measure of the environment, gives a better knowledge of environmental deterioration. Several studies examine the relationship between FD, energy, development, and emissions to produce better policy solutions for managing both development and the environment at the same time (Majeed, Samreen, Tauqir, & Mazhar, 2020). These studies provide diverse policy suggestions for different nations and locations based on inconclusive results.…”