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Time-Varying Impact of Financial Development on Carbon Emissions in G-7 Countries: Evidence from the Long History

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  • Shahbaz, Muhammad
  • Destek, Mehmet Akif
  • Dong, Kangyin
  • Jiao, Zhilun

Abstract

Financial development has been widely proved to be a key driver of economic growth; however, its environmental impact is still inconclusive, especially for G-7 countries (i.e. Canada, France, Germany, Italy, Japan, the United Kingdom (UK), and the United State (US)). This paper, therefore, investigates the time-varying impact of financial development on carbon dioxide (CO2) emissions for G-7 countries over a long historical period. The study analyzes historical data from 1870 to 2014 for each country using bootstrap time-varying co-integration (TVC) and bootstrap rolling window estimation approaches. In addition, the polynomial trends of the estimated parameters are obtained to observe the relationship between financial development and carbon emissions. The empirical findings reveal that the impact of financial development on CO2 emissions over a long history is M-shaped in Canada, Japan, and the US; inverted N-shaped in France, Italy, and the UK; and inverted M-shaped (W-shaped) in Germany. This empirical evidence opens new directions for policy makers to design comprehensive economic policy for using the financial sector as an economic tool to keep environmental quality at sustainable levels.

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  • Shahbaz, Muhammad & Destek, Mehmet Akif & Dong, Kangyin & Jiao, Zhilun, 2021. "Time-Varying Impact of Financial Development on Carbon Emissions in G-7 Countries: Evidence from the Long History," MPRA Paper 108375, University Library of Munich, Germany, revised 18 Jun 2021.
    • Handle: RePEc:pra:mprapa:108375
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    Keywords

    Financial Development; CO2 Emissions; Non-linear Analysis; Time-varying Co-integration (TVC); G-7;
    All these keywords.

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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