Exploring the Relationship between Financial Development and Ecological Footprint in Top Green Economies

Abstract

The aim of this study is to investigate how financial development does influence ecological footprint by examining 10 green nations recognized as top performers in the latest report of the Global Finance Magazine. The panel dataset, extracted from WBI and collected on an annual frequency, covers the 14-year period from 2010 to 2023 (inclusive). In accordance with the conduction of Hausman Test, the appropriate methodology applied to the empirical analysis in EViews10 programme is the Fixed Effects Model (FEM). In terms of the regression model, CO2 intensity is the dependent variable and proxy for ecological footprint, whereas FDI inflows, urban population, GDP growth, trade, domestic credit to private sector and domestic credit to private sector by banks as independent variables. The latter two determinants of interest are chosen as proxies to capture the financial inclusion, while the four others stand as controlling variables. According to the findings, FDI net inflows are statistically insignificant and proved to have no impact on ecological footprint. Moreover, it is revealed that CO2 intensity is enhanced through the effect of domestic credit to private sector by banks and GDP growth which are discovered to be statistically significant at 95% Confidence level. In contrast, the other indicators, domestic credit to private sector, urban population and trade openness show statistical significance, but have a negative effect on ecological footprint. The insights of this study could aid policymakers, environmental economists, and development planners to design comprehensive strategies for green growth.