Does finance affect environmental degradation: evidence from One Belt and One Road Initiative region?

Abstract

This paper explores the effects of finance on environmental degradation and investigates environmental Kuznets curve (EKC) of each country among 52 that participate in the One Belt and One Road Initiative (OBORI) using the latest long panel data span (1980-2016). We utilized panel long run econometric models (fully modified ordinary least square and dynamic ordinary least square) to explore the long-run estimates in full panel and country level. Moreover, the Dumitrescu and Hurlin (2012) causality test is applied to examine the short-run causalities among our considered variables. The empirical findings validate the EKC hypothesis; the long-run estimates point out that finance significantly enhances the environmental degradation (negatively in few cases). The short-run heterogeneous causality confirms the bi-directional causality between finance and environmental degradation. The empirical outcomes suggest that policymakers should consider the environmental degradation issue caused by financial development in the One Belt and One Road region.

Keywords: Dynamic ordinary least square (DOLS); Environmental Kuznets curve; Environmental degradation; Finance; Fully modified ordinary least square (FMOLS); Heterogeneous causality; One Belt and One Road Initiative (OBORI).