Assessing Impact of Macroeconomic Instability on Green Finance: Evidence from Latin America

This study explores the relationship between macroeconomic instability and the development dynamics of green finance in Latin America. The article focuses on longitudinal data of five representative economies: Brazil, Mexico, Argentina, Chile and Venezuela over the 2016–2024 period. Considering a global trend toward decarbonization, the accumulation of green capital in emerging markets remains contingent upon domestic economic stability. Based on Signalling Theory and Prospect Theory, this research implies that macroeconomic volatility is perceived as a negative condition by investors, triggering risk-averse and loss-averse behaviour. By applying a method of fixed effects, pooled OLS and FGLS regression analysis, the study employs the amount of green bond issued as a proxy for green finance, while gross capital formation and foreign exchange volatility as the primary independent variables. Control variables include GDP growth. Regarding results, the expectations suggest that high foreign exchange volatility has a significant negative impact on the green bond market depth, effectively crowding out sustainable finance in favour of short-term lending. However, the actual findings do not confirm the traditional perception. These findings provide critical insights for policymakers in the region about the credible signal that green finance opportunities can bring. The key aspect is the enhancement of stable macroeconomic framework which is essential for successful transition to green economy and the attraction of international green capital.