Financial development and environmental degradation: insights from European countries

Alexandra Horobet, Taoufik Bouraoui, Irina Mnohoghitnei, Daniel Balsalobre-Lorente and Lucian Belascu
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Alexandra Horobet: A.S.E. - The Bucharest University of Economic Studies / Academia de Studii Economice din Bucureşti
Taoufik Bouraoui: ESC [Rennes] - ESC Rennes School of Business
Irina Mnohoghitnei: A.S.E. - The Bucharest University of Economic Studies / Academia de Studii Economice din Bucureşti
Daniel Balsalobre-Lorente: UCLM - Universidad de Castilla-La Mancha = University of Castilla-La Mancha, CZU - Czech University of Life Sciences Prague
Lucian Belascu: Universitatea "Lucian Blaga" Sibiu

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Abstract: We investigate the relationship between financial development and environmental quality during 1996–2019 in a panel analysis of 40 European countries, of which 28 EU and 12 non-EU member countries. We built four empirical models to check the connection between financial development and environmental degradation while controlling for GDP growth, trade openness, FDI, and energy consumption. We applied the Dynamic Common Correlated Effects (DCCE) estimator because of cross-sectional dependence (CSD) among the panel cross-sections. Our findings report a positive association between financial development and environmental degradation for the entire panel of European countries. The subsequent analysis of sub-groups shows that this is particularly the case for non-EU member countries and countries with a high level of financial development. Furthermore, there is a bidirectional causality between financial development, energy consumption or trade openness, and environmental degradation in European countries.

Keywords: Environmental degradation; Financial development; Energy consumption; trade openness; DCCE estimator (search for similar items in EconPapers)
Date: 2025-07-09
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Published in Applied Economics, 2025, 57 (32), pp.4679-4694. ⟨10.1080/00036846.2024.2364087⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05152265

DOI: 10.1080/00036846.2024.2364087

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