Does financial development asymmetrically affect CO2 emissions in China? An application of the nonlinear autoregressive distributed lag (NARDL) model

Abstract

The current study looks at the causes of carbon dioxide (CO2) emissions by considering the implications of financial development in the presence of economic growth and use of energy in the case of China over the period 1980–2014. This study first uses the nonlinear autoregressive distributive lag (NARDL) model to capture the asymmetry that arises from positive or negative components of financial development following use of the ARDL technique. The findings confirm a symmetrical relationship of both positive and negative effects of financial development on carbon emissions in the model, which allows the use of the ARDL approach. Results of the ARDL bound test confirm a long-term and positive relationship among CO2 emissions, financial development, economic growth and energy use. Further, the error correction model (ECM) confirms a short-run relationship among CO2 emissions, financial development, economic growth and energy use. Moreover, a dynamic multiplier graph indicates that the positive component of financial development has more influence on carbon emissions in the long run as compared to negative financial development shocks. The findings suggest that there is no asymmetry between CO2 emissions and financial development, lending support to the symmetric impact of both positive and negative components of financial development.