Do Asymmetric Financial Development Shocks Matter for CO2 Emissions in Africa? A Nonlinear Panel ARDL–PMG Approach

Abstract

This paper aims to study the response of CO2 emissions in the African continent to asymmetric financial development shocks by incorporating this asymmetric component in the environmental Kuznets curve (EKC) hypothesis. Following the Shin et al. (2014) nonlinear autoregressive distributed lag (ARDL) approach in panel form, we construct a nonlinear panel ARDL–PMG model to assess both short- and long-run impact of positive and negative financial development movements on CO2 emissions, for a panel of 22 African countries over the period 1980–2014. Asymmetric results prove first that the EKC hypothesis is found to be supported in the long term but not supported in the short term in Africa. Positive financial development shocks are found to be beneficial for fighting against pollution in the long run. However, the asymmetric findings prove that financial instability exerts a positive impact on CO2 emissions in the short run. In terms of policy implications, African governments should put in place durable policies favouring the development of their financial systems, make funding of green projects less vulnerable in the short term to negative shocks hitting financial systems and improve financial development in the long term, by reducing market imperfections.