Does monetary policy lead to pollution haven via financial agglomeration in an R&D-based location model?

Financial policies are attracting attention as ESG investments are introduced to combat global warming. However, these financial policies may increase the financing of polluting firms while encouraging the development of decarbonisation technologies. Hence, the development of financial markets and financial agglomeration may not necessarily lead to pollution reduction or decarbonisation. Additionally, the location of firms because of financing leads to pollution havens. This study uses an R&D-based location model to analyse the impact of financial and environmental policies on firm location and foreign direct investment, as well as on economic growth and pollution emissions. Moreover, this study compares effects of financial and environmental policies in a deflation and inflation economies. According to the Fisher equation in a deflation economy, emission permit reductions decrease global pollution but do not affect location or growth. Interest rate cuts develop financial markets in terms of borrowing and economic growth. Financial de-agglomeration in the North and financial agglomeration in the South then shift pollution havens from the North to the South. This shift leads to decreased pollution in the North and increased pollution in the South. In an inflation economy, the interest rate has an inverse U-shaped effect on location, and so, interest rate hikes shift causes this pollution haven under a higher interest rate. In both economy, trade liberalisation leads to the pollution haven hypothesis. Emission quota reductions can mitigate increases in pollution due to monetary policy. A mix of monetary and environmental policies is beneficial for sustainable development.