Does negative interest rate policy impact carbon emissions? Evidence from a quasi-natural experiment

Abstract

Financial policy is an essential tool for achieving sustainable economic development and has been extensively studied in the environmental economics literature. This study employs panel data of 45 countries from 2007 to 2019 and a multi-period difference-in-differences (DID) method to investigate the mechanism and transmission path of negative interest rate policy on carbon dioxide emissions. The results indicate that the implementation of negative interest rate policy can significantly reduce CO2 emissions, and various robustness tests substantiate this result. Mechanism tests show that when the interest rate breaks the zero lower bound constraint, CO2 emissions can be reduced through the exchange rate channel, while the credit channel is blocked. Furthermore, the mitigation effect of negative interest rate policy varies with country heterogeneity, and countries with low comprehensive development, high economic growth, and high investment levels have more potential to control environmental degradation. The study evaluates the effects of negative interest rate policy from an environmental perspective, providing useful policy insights for monetary authorities to formulate effective policies to promote coordinated economic and environmental development.