Economic Growth, Financial Development and CO2 Emission: PSTR Approach

The aim of this paper is to assess the sign and magnitude of the nonlinear effects of main socio-economic variables as well as the financial development index (measured by private credit to GDP ratio) on environmental pollution. Specifically, the interaction of the socio-economic variables with financial development as a threshold variable in affecting CO2 emission is studied. In this respect the Panel Smooth Transition Regression (PSTR) technique is applied to a panel-data set for 16 middle income countries (including some countries of BRIC and Iran) during the period 1970-2013.It is found that the output level and energy use have a positive significant effect on CO2 emission although their effects at higher levels of financial development decrease and increase respectively i.e. financial development provides motivations for shifting to eco-friendly technologies but not being effective for applying fuel efficient technologies in energy consumption. Moreover, it is shown that as the economies reach higher levels of financial development, the effect of population on CO2 emission intensifies. As to the effect of financial development, it has a positive significant effect on pollution with a threshold level of 34 % for financial development index, i.e. up to this point, the effect of financial development on the pollution, rises at an increasing rate.