Financial development and climate vulnerability in the MENA region: Asymmetric evidence from quantile-on-quantile regression

This paper examines the asymmetric and heterogeneous relationship between financial development and climate change vulnerability in the Middle East and North Africa (MENA) region. It employs the recent non-parametric quantile-on-quantile regression (QQR) approach to explore how different levels of financial development asymmetrically affect various levels of climate vulnerability. Analyzing these asymmetric effects is crucial, as financial development may not uniformly mitigate climate vulnerability; rather, its impact may depend either on the level of financial development or on the country's initial climate vulnerability. Using data from 17 MENA countries over the period 1995–2020, the findings reveal that financial development significantly reduces climate vulnerability at lower quantiles. However, its effects at higher levels of vulnerability are more complex and sometimes ambiguous, suggesting that highly climate-vulnerable economies may require complementary policies beyond financial development alone. Furthermore, by distinguishing between the financial markets index and the financial institutions index, the results highlight that financial institutions play a more substantial role in mitigating climate vulnerability across most quantiles compared to financial markets. Given the significant economic and environmental diversity within the MENA region, we further analyze the data by considering two sub-regions: North Africa and the Middle East. This sub-sample analysis reveals that the resilience induced by financial development differs across these regions due to variations in financial structures, climate exposure, and institutional frameworks. By considering the role played by natural resource endowment, the the analysis supports the "curse" hypothesis. These insights underscore the necessity of tailored climate and financial policies that address the unique vulnerabilities of each sub-region, rather than adopting a one-size-fits-all approach.