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

Halkos, George and Polemis, Michael (2016): Examining the impact of financial development on the environmental Kuznets curve hypothesis.

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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.

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