The Non-Linear Impact of Financial Development on Environmental Quality and Sustainability: Evidence from G7 Countries

Cristina Ruza and Raquel Caro-Carretero
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Cristina Ruza: Applied Economics Department, Economics and Business Faculty, National Distance Teaching University (UNED), C/Senda del Rey no. 11, 28040 Madrid, Spain
Raquel Caro-Carretero: The AON Spain Foundation Chair in Disasters, The University Institute of Studies on Migration, Comillas Pontifical University, C/Alberto Aguilera 23, 28015 Madrid, Spain

IJERPH, 2022, vol. 19, issue 14, 1-21

Abstract: This paper analyses the impact of financial development on the environmental quality and sustainability for the group of G7 countries over the period 1990–2019 based on static panel data-fixed effect models. The objective is to explore if there exists a non-linear relationship between the whole financial system development and a wide array of measures of environmental sustainability and degradation, namely adjusted net savings, greenhouse gas, CO 2 , methane, nitrous oxide emissions and ecological footprint. We define a new Financial Environmental Kuznets Curve (FEKC) by introducing the square term of financial development on the environment-finance relationship. Empirical results prove the existence of non-linear relationships between the composite index of financial development and environmental degradation for the group of advanced economies. In the case of methane, we validate the presence of an inverted-U shape association in line with the FEKC hypothesis, while for greenhouse gas and CO 2 the link follows a U-shaped pattern. The impact of financial development on environmental sustainability is monotonically positive and statistically significant while the ecological footprint is not statistically linked with the level of financial development within G7 countries. Economic growth, human capital, population density and primary energy consumption appear as significant drivers of environmental quality and sustainability.

Keywords: CO 2; greenhouse gases; methane; nitrous oxide; ecological footprint; environmental sustainability; financial development; Environmental Kuznets Curve (search for similar items in EconPapers)
JEL-codes: I I1 I3 Q Q5 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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