Can financial development affect environmental quality in the presence of economic uncertainty and informal activities? Exploring the linkages in the middle-income countries

Abstract

PurposeThe significance of this research lies in providing an understanding of how economic conditions, including financial development, informal economic activities and economic uncertainty, influence carbon emissions and tries to offer valuable insights for policymakers to promote sustainable development.Design/methodology/approachThe Panel-ARDL method is employed for a group of 30 developing countries from 1990 to 2018. This study analyzes the data obtained from the World bank, International Monetary Fund and World Uncertainty databases.FindingsBased on the empirical results of the extended model, an increase in GDP and energy intensity is associated with an 83 and 14% increase in carbon emissions, respectively. Conversely, a 1% increase in financial development and economic uncertainty is linked to significant decrease in carbon emissions (about 47 and 23%, respectively). Finally, an increase in the informal economy can lead to a negligible yet significant decrease in carbon emissions. These results reveal that financial development plays an effective role in reducing CO2 emissions. Moreover, while economic uncertainty and informal economy are among unfavorable economic conditions, they contribute in CO2 reduction.Practical implicationsTherefore, fostering financial development and addressing economic uncertainty are crucial for mitigating carbon emissions, while the impact of informal economy on emissions, though present, is relatively negligible. Accordingly, policies to control uncertainty and reduce the informal economy should be accompanied by environmental policies to avoid increase in emissions.Originality/valueThe originality of this paper lies in its focus on fundamental changes in the economic environment such as financial development, economic uncertainty, and informal activities as determinants of carbon emissions. This perspective opens up new avenues for understanding the intricate relationship between carbon emissions and economic factors, offering unique insights previously unexplored in the literature.