Does Financial Development Moderate the relationship between Economic Growth- and Environmental Quality?

Does Financial Development Moderate the relationship between Economic Growth- and Environmental Quality?

Mitigating the world's emission levels and ensuring sustainable growth are strategic objectives of modern economies. Yet how financial development affects environmental quality in achieving economic growth is not clearly understood. Therefore, this study aims to analyze the moderating effect of financial development on the economic growth-environmental quality nexus using Australia as a case. Covering the period from 1980 to 2021, this study employs the Autoregressive Distributed Lag (ARDL) model to estimate direct and moderating effects. Empirically, a cointegration relationship is revealed. Moreover, in the long run, both a significant adverse direct effect and an adverse moderating effect of financial development on environmental quality are revealed. This confirms that financial development degrades environmental quality, and its moderating impact worsens relationship between economic growth and environmental quality. Moreover, economic growth and energy consumption adversely affect environmental quality, while trade openness promotes a healthier environment. The short-run impacts generally align with the long-run findings, except for trade openness. While foreign direct investment plays a neutral role in the long run, it contributes to environmental degradation in the short run. Finally, the empirical findings suggest policy implications for enhancing environmental quality by directing financial allocations towards green avenues.