An analysis between financial development, institutions, and the environment: a global view

Financial development is important for the growth of a country which indirectly affects the environment adversely through industrialization. However, in the presence of strong institutions, this adverse effect can be reduced. The main concern of the present study is to estimate the relation between CO₂ and financial development (FD) in the presence of economic institutions as an interactive term. A sample of 101 countries has been selected for econometric analysis for the period from 1995 to 2017. The cross-section dependence test statistics for dependency, CIPS and CADF for panel unit root test, Westerlund test to ascertain the long-run affiliations, and FMOLS to extract the long-run coefficients have been applied. Dumitrescu and Hurlin test is also employed to know about the causal nature of the panel series. The findings show that financial development has a positive relationship with CO₂. However, after inclusion of economic intuitions, the adverse impact of financial development on the environment is reduced. The study also confirms the presence of environmental Kuznets curve in the context of income and financial development. The findings imply that financial development can help to improve environment quality if it is accompanied with strong institutional framework such as assurance of property rights, government integrity, and liberalization in financial sector.