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Examining the impact of financial development on the environmental Kuznets curve hypothesis

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  • Halkos, George
  • Polemis, Michael

Abstract

In this study, building a simple model that incorporates static and dynamic elements, the relationship of financial development and economic growth on the environmental degradation is investigated together with the validation of the Environmental Kuznets Curve (EKC) hypothesis. Our analysis is based on an unbalanced panel data set covering the OECD countries over the period 1970-2014. Our approach strongly accounts for the presence of cross-sectional dependence between the sample variables and utilizes second generation panel unit root tests in order to investigate possible cointegration relationships. The empirical findings do indicate that local (NOX per capita emissions) and global (CO2 per capita emissions) pollutants redefine the EKC hypothesis when we account for the presence of financial development indicators. Specifically, in the case of global pollution an N-shape relationship is evident both in static and dynamic framework with a very slow adjustment, whereas a monotonically decreasing relationship is found in the case of local pollutants with a much quicker dynamic adjustment. Lastly, we argue that policy makers and government officials have to cultivate investments in network industries (energy, telecommunications, transportation) by promoting cutting edge research and development financial projects and cost effective mitigation methods.

Suggested Citation

  • Halkos, George & Polemis, Michael, 2016. "Examining the impact of financial development on the environmental Kuznets curve hypothesis," MPRA Paper 75368, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75368
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    Keywords

    Environmental Kuznets Curve; Cross-sectional dependence; Financial development; Panel data.;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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