Causality between Environment and Financial Development in case of Pakistan: A Time Series Analysis

Abstract

Climate change is now widely regarded as one of the greatest issues of our era. As a result, it is critical to study the impact of various macroeconomic variables on the environment. The purpose of this research is to look at the link between financial development and environmental (CO2 emissions) in Pakistan from 1980 to 2014. The Auto Regressive Distributed Log (ARDL) technique was employed to track both long-term and short-term association between variables in this investigation. Granger causal testing is used to examine the causal relationship. Study results suggest that there is a unidirectional causality between CO2 and the financial development Index. However, the environment (CO2 emissions) in the long run will depend on the financial development that the financial development index (domestic credit to private sector aggregate market capitalization, and FDI) has in Pakistan. In the second model, the environment (energy consumption) also depends on financial development.