Financial inclusion and the environmental deterioration in Eurozone: The moderating role of innovation activity

Abstract

With rapid economic development through financial inclusion and its detrimental impact on the environment, economies have been driven to seek innovative and ecofriendly solutions to mitigate the negative effects of global warming. This study investigates the moderating role of innovation activity (researchers’ engagement in research and development) on the association between financial inclusion and environmental degradation using panel data on 27 European countries for the period of 1995–2018. This study employs a novel nonparametric econometric technique called the method of moments quantile regression. This method is robust to outliers and provides an asymmetric relationship among variables. The findings reveal that financial inclusion leads to environmental deterioration in the Eurozone. However, innovation activity significantly and negatively moderates the relationship between financial inclusion and environmental degradation in all quantile distributions. Economic growth and renewable energy consumption positively and negatively impact environmental pollution, respectively. Our findings are robust with alternative proxies of the environment (i.e., ecological footprints and CO2 emissions) and alternative methods (i.e., fully modified ordinary least squares (OLS), fixed effects OLS, and dynamic OLS). This study is beneficial for policymakers in adopting innovation activities that reduce the harmful effects of an upsurge in economic activities in the Eurozone.