Unveiling the liaison between financial development dimensions, energy efficiency and ecological footprint in the context of institutional frameworks: evidence from the Emerging-7 economies.

Abstract

Financial development and energy efficiency can facilitate the transition towards a more environmentally sustainable and responsible economy. Simultaneously, the importance of institutional effectiveness cannot undermine the need to manage financial and energy consumption activities. To this end, the primary objective of this study is to examine the effects of financial development and energy efficiency on the ecological footprint of the Emerging-7 economies from 2000 to 2019. The study specifically focuses on the influence of these factors within the context of robust institutional mechanisms. We employ the STIRPAT (Stochastic Impacts by Regression on Population, Affluence, and Technology) model as the analytical framework to accomplish this. This study takes into consideration three aspects of financial development, which are: (i) the depth of financial development, (ii) the stability of financial development, and (iii) the efficiency of financial development. In addition, this study has developed an institutional index using principal component analysis. The index comprises several crucial indicators: Control of Corruption, Government Effectiveness, Political Stability, Regulatory Quality, Rule of Law, and Voice and Accountability. The study raises the importance of energy efficiency in terms of energy intensity on ecological footprint. The study's findings suggest that without robust institutional mechanisms, the potential of financial development depth, stability, and efficiency to improve ecological well-being may not be fully realized. However, the study concludes that these institutional mechanisms positively impact mitigating the ecological footprint.