Exploring the linkage between financial development and ecological footprint in APEC countries: A novel view under corruption perception and environmental policy stringency

Abstract

Balancing economic growth and a sustainable environment has been a concern for governments. However, it has been observed that sustainable development is related to economic factors, the institutional environment, and the effectiveness of environmental regulatory policies. This study empirically investigates the relationship between financial development, strict environmental regulations, corruption, foreign direct investment, trade openness, renewable energy consumption, and ecological footprint. We used annual panel data of Asia-Pacific Economic Cooperation countries from 1994 to 2018 to fill the research gap. The present study follows a perspective that produces reliable and robust results using Fully Modified Ordinary Least Squares and panel fisher causality analysis. The long-run flexibility estimates calculated with the Fully Modified Ordinary Least Squares approach explain the inverted U relationship between financial development and ecological footprint. Long-run elasticity estimates suggest that strict environmental policies, renewable energy consumption, financial development and corruption, and the interaction of financial development and strict environmental policies reduce the ecological footprint. In addition, foreign direct investment and trade openness are found to increase the ecological footprint. This confirms the pollution haven hypothesis in Asia-Pacific Economic Cooperation countries. According to the causality test results, bidirectional causality relationships were discovered between ecological footprint and financial development, strict environmental policies, corruption, renewable energy sources, foreign direct investment and trade openness. We suggest that institutional financial framework and financial development for APEC countries will reduce environmental degradation in the long run, and sustainable development can be achieved through the institutional environment and the effectiveness of environmental regulatory policies.