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Financial Development, Environmental Quality and Economic Growth

Author

Listed:
  • Shushu Li

    (Institute of Policy and Management, Chinese Academy of Sciences, Haidian District, No. 15 Zhong Guan Cun Beiyitiao, Beijing 100190, China
    These authors contributed equally to this work.)

  • Jinglan Zhang

    (School of Finance, Renmin University of China, No. 59 Zhong Guan Cun Street, Haidian District, Beijing 100872, China
    These authors contributed equally to this work.)

  • Yong Ma

    (China Financial Policy Research Center, School of Finance, Renmin University of China, No. 59 Zhong Guan Cun Street, Haidian District, Beijing 100872, China
    These authors contributed equally to this work.)

Abstract

In this study, the relationships between financial development, environmental quality and economic growth are studied based on data from 102 countries over the period 1980–2010 using the generalized method of moments (GMM) estimation. The econometric results show the following three basic conclusions: First, both financial development and environmental quality have a significant impact on economic growth and should be included in the production function of the economic growth model as important variables. Second, there is a significant and robust “inverted U-shaped” relationship between financial development and economic growth; with the improvement of the level of financial development, economic growth would first increase and then decrease, which is consistent with the results of previous studies. Third, there is also a significant and robust “inverted U-shaped” relationship between economic growth and carbon emissions, indicating that there exists a “critical point” at which achieving economic growth comes at the expense of environmental quality, and after passing the critical point, the deterioration of environmental quality will lead to a significant slowdown in economic growth. In addition, the econometric analysis in this paper also shows that there was a mutually promoting and strengthening relationship between financial development and environmental quality. Specifically, the degree of financial development can further strengthen the promoting effect of environmental quality on economic growth; meanwhile, an improvement in environmental quality can also strengthen the promoting effect of financial development on economic growth. Financial development and environmental quality could influence economic growth through strengthening the marginal product effects of capital and labor, which further indicates the that both financial and environmental factors play an important role in modern economic development.

Suggested Citation

  • Shushu Li & Jinglan Zhang & Yong Ma, 2015. "Financial Development, Environmental Quality and Economic Growth," Sustainability, MDPI, vol. 7(7), pages 1-22, July.
    • Handle: RePEc:gam:jsusta:v:7:y:2015:i:7:p:9395-9416:d:52738
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