The role of financial development in enhancing trades in environmental goods: International insights from 119 countries

Abstract

This paper attempts to empirically examine the influences of financial development (FIN) on the trade in environmental goods (TEG). Through the application of diverse econometric techniques to a global sample of 85 developing and 34 developed countries from 2000 to 2019, the estimation results demonstrate that the financialization captured by nine indices from the Financial Development Index database has a light influence on the trade values of environmental goods. The development of both financial institutions and market positively influences the trade activities of environmental goods, but financial institutions' role is more critical. We find robust results by utilizing various econometric techniques and adding more explanatory variables. Furthermore, there is evidence on the long-term cointegration between financial development and TEG, and our results confirm its effects in the long term. Finally, the nexus between the two samples: developing and developed countries, but the importance of both financial institutions is more evident, especially in the developed countries. Finally, the effects of uncertainty or risk on TEG value become less sizable if these economies have a well-developed financial system.