Financial System Development and Environmental Quality: A System-GMM Dynamic Panel Analysis

Abstract

The connection between financial development and carbon emissions is intricate, considering both theoretical frameworks and empirical evidence. Consequently, this study seeks to reassess the relationship between these variables in Gulf Cooperation Council (GCC) countries from 2010 to 2020, employing a dynamic GMM approach. Findings affirm the presence of a nonlinear relationship between financial development and environmental pollution. They specifically indicate that banking industry and financial markets have a twofold influence on environmental quality, encompassing both detrimental and beneficial outcomes. Results indicate that a more developed financial system decreases pollution emissions in GCC countries. The results hold noteworthy policy implications for GCC countries as they work towards achieving their goals related to the establishment of a low-carbon economy.