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Financial development and environmental degradation: insights from European countries

Author

Listed:
  • Alexandra Horobet
  • Magdalena Radulescu
  • Taoufik Bouraoui
  • Irina Mnohoghitnei
  • Daniel Balsalobre-Lorente
  • Lucian Belascu

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.

Suggested Citation

  • Alexandra Horobet & Magdalena Radulescu & Taoufik Bouraoui & Irina Mnohoghitnei & Daniel Balsalobre-Lorente & Lucian Belascu, 2025. "Financial development and environmental degradation: insights from European countries," Applied Economics, Taylor & Francis Journals, vol. 57(32), pages 4679-4694, July.
    • Handle: RePEc:taf:applec:v:57:y:2025:i:32:p:4679-4694
    DOI: 10.1080/00036846.2024.2364087
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