Revisiting the EKC hypothesis by assessing the complementarities between fiscal, monetary, and environmental development policies in China.

Abstract

Recently, China has declared its national objective of becoming carbon neutral by 2060. Hence, mitigating carbon dioxide emissions has become an important agenda of the Chinese government. Against this backdrop, this paper aims to evaluate the effectiveness of pursuing expansionary fiscal and monetary policies on China's carbon dioxide emission figures by using annualfrequency data from 1980 to 2018. Accordingly, this study considers the levels of government expenditure and broad money supply as fiscal and monetary policy instruments, respectively. Besides accounting for structural break concerns in the data, the findingsfrom the empirical analysis reveal that there are long-run associations between carbon dioxide emissions, economic growth, and fiscal and monetary expansion in China. Moreover, the results also show that in both the short- and long-run expansionary fiscal policy triggerhigher carbon dioxide emissions while expansionary monetary policy inhibits the carbon dioxide emission figures of China. Furthermore, theresults invalidate the existence of the Environmental Kuznets Curve hypothesis since the relationship betweenChina's economic growth and carbon dioxide emissions is evidenced to portray an N-shape. In line with these findings, it is recommended that China achieve environmentally sustainable economic growth by aligning the national fiscal and monetary policies with the 2060 carbon-neutrality objective.