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Financial Development-Environmental Degradation Nexus in the United Arab Emirates: The Importance of Growth, Globalization and Structural Breaks

Shahbaz, Muhammad and Haouas, Ilham and SBIA, Rashid and Ozturk, Ilhan (2018): Financial Development-Environmental Degradation Nexus in the United Arab Emirates: The Importance of Growth, Globalization and Structural Breaks.

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Abstract

The financial development-environmental degradation nexus is revisited by incorporating economic growth, electricity consumption and economic globalization into the CO2 emissions function. The study period spans 1975QI-2014QIV in the United Arab Emirates. We have applied structural break and cointegration tests to examine unit root and cointegration between the variables. The Toda-Yamamoto causality test is employed to investigate the causal relationship between the variables, and the robustness of causality linkages is tested by applying the innovative accounting approach.

Our empirical analysis shows cointegration between the series. Financial development increases CO2 emissions. Economic growth is positively linked with environmental degradation. Electricity consumption improves environmental quality. Economic globalization affects CO2 emissions negatively. The relationship between financial development and CO2 emissions is U-shaped and inverted N-shaped. Furthermore, financial development causes environmental degradation and environmental degradation causes financial development in the Granger sense.

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