Does macroeconomic instability cause environmental pollution? The case of Pakistan economy.

Abstract

This study aims to investigate the relationship between carbon dioxide (CO2) emissions, macroeconomic instability, real output (GDP), the square of real output (GDP2), and financial development in Pakistan using the annual dataset over the period 1971-2016. The long-run analysis is based on the ARDL bound testing approach to cointegration, whereas the short-run dynamics are observed using error correction model. The results of the bound testing approach indicate that there exists a long-run relationship between the selected variables and macroeconomic instability increases pollution emissions. In addition, the study supports the presence of environmental Kuznets curve (EKC) hypothesis for Pakistan economy where, in low-income regime, an increase in GDP causes more emissions and, in high-income regime, the relationship between GDP and CO2 emissions becomes negative. Finally, financial development variables exert a positive impact on environmental degradation. Based on these findings, our study supports a strong role of macroeconomic stability in achieving the targets of pollution reductions.