Financial Development and Ecological Footprint: A Global Panel Data Analysis

This study examines the environmental effects of financial development using a comprehensive indicator of ecological footprint for a panel of 131 countries from 1971 to 2017. For the empirical analysis, pooled ordinary least squares (OLS), fixed effects model, random effects model, Driscoll-Kraay (DK) standard errors, and system generalized method of moments (GMM) are employed. The findings reveal that all indicators of financial development namely domestic credit to private sector, domestic credit to private sector by banks, and domestic credit provided by financial sector significantly help to improve the environmental quality by reducing the ecological footprint. Comparatively, the effect of domestic credit to private sector is stronger than other measures of financial development. Similarly, urbanization has been accompanied by the significant reduction in ecological footprint. In contrast, energy consumption, foreign direct investment (FDI), and GDP per capita worsen the environmental quality by increasing the ecological footprint. The study also validates the existence of “pollution haven hypothesis” for the global economy. Findings of the study have global implications. In general, financial sector has the potential to support the global efforts towards environmental protection. However, regional or country specific experiences can differ depending upon the financial sector priority towards environmental protection.