Financial Market Development and CO2 Emissions Nexus in Nigeria: An Application of ARDL Approach
Downloads
The paper investigated the impact of financial development on CO2 emissions in Nigeria from 1981 to 2019. In the process of investigating the impact, Augmented Dickey-Fuller and Philip Perron, as well as the Zivot-Andrew structural breaks, unit root tests were applied. Their results indicated that financial development, level of income, and CO2 emissions were stationary at the first difference and that of Zivot-Andrew structural breaks indicated a mixture of integration. Cointegration relationship among the variables was established through autoregressive distributed lag model bounds test. The autoregressive distributed lag model long-and-short run models results indicated that financial development and income level significantly negatively impact the CO2 emissions. The suggestion based on these results is that financial development and income level help in financing clean projects in the long-and-short runs. The Granger causality result revealed bidirectional causality from financial development to CO2 emissions, income level to CO2 emissions, and financial development to income level. The variance decomposition analysis indicates that financial development and income level have contributed less to CO2 emissions, and impulse response function results revealed that CO2 emissions respond negatively to shocks in financial development and income level. Therefore, we recommend expanding the Nigerian financial market in financing clean projects for a clean environment alongside checking income generation activities that bring about emissions of CO2, such as burning trees for charcoal production in the forest, among others.
Keywords: Financial Market Development, CO2 Emissions, ARDL Approach
JEL: G20, Q53, C32
Ahmed, K., Shahbaz, M., Qasim, A., & Long, W. (2015). The linkages between deforestation, energy and growth for environmental degradation in Pakistan. Ecological Indicators, 49, 95–103. https://doi.org/10.1016/j.ecolind.2014.09.040
Alrifai, K., Kalloub, M., & Musabeh, A. (2020). Financial development, economic growth and welfare: evidence from emerging countries. Pressacademia, 9(2), 118–131. https://doi.org/10.17261/pressacademia.2020.1218
Ang, J. B. (2008). Economic development, pollutant emissions and energy consumption in Malaysia. Journal of Policy Modeling, 30(2), 271–278. https://doi.org/10.1016/j.jpolmod.2007.04.010
Birdsall, N., & Wheeler, D. (1993). Trade Policy and Industrial Pollution in Latin America: Where Are the Pollution Havens? The Journal of Environment & Development, 2(1), 137–149. https://doi.org/10.1177/107049659300200107
Bittencourt, M. (2012). Financial development and economic growth in Latin America: Is Schumpeter right? Journal of Policy Modeling, 34(3), 341–355. https://doi.org/10.1016/j.jpolmod.2012.01.012
Çetin, M., & Ecevit, E. (2017). The impact of financial development on carbon emissions under the structural breaks: Empirical evidence from Turkish economy. International Journal of Economic Perspectives, 11(1), 64–78.
Choong, C.-K., & Chan, S.-G. (2011). Financial development and economic growth: A review. African Journal of Business Management, 5(6), 2017–2027.
ÄŒižo, E., Lavrinenko, O., & Ignatjeva, S. (2020). Analysis of the relationship between financial development and economic growth in the EU countries. Insights into Regional Development, 2(3), 645–660. https://doi.org/10.9770/ird.2020.2.3(3)
Claessens, S., & Feijen, E. (2006). Financial sector development and the millennium development goals. World Bank Working Paper. https://doi.org/10.2139/ssrn.950269
Crippa, M., Oregionni, G., Guizzard, D., Muntean, M., Schaaf, E., Lo Vullo, E., ... Olivier, J. (2019). Fossil CO2 and GHG emissions of all world countries. Journal of Geophysical Research: Atmospheres. Retrieved from https://edgar.jrc.ec.europa.eu/overview.php?v=booklet2019
Dickey, D. A., & Fuller, W. A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, 49(4), 1057–1072. https://doi.org/10.2307/1912517
Durusu-Ciftci, D., Ispir, M. S., & Yetkiner, H. (2017). Financial development and economic growth: Some theory and more evidence. Journal of Policy Modeling, 39(2), 290–306. https://doi.org/10.1016/j.jpolmod.2016.08.001
Epule, T. E., Peng, C., & Lepage, L. (2015). Environmental refugees in sub-Saharan Africa: a review of perspectives on the trends, causes, challenges and way forward. GeoJournal. https://doi.org/10.1007/s10708-014-9528-z
Frankel, J. A., & Romer, D. (1999). Does trade cause growth? American Economic Review, 89(3), 379–399. https://doi.org/10.1257/aer.89.3.379
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424. https://doi.org/10.2307/1912791
Halicioglu, F. (2009). An econometric study of CO2 emissions, energy consumption, income and foreign trade in Turkey. Energy Policy, 37(3), 1156–1164. https://doi.org/10.1016/j.enpol.2008.11.012
Jalil, A., & Feridun, M. (2011). The impact of growth, energy and financial development on the environment in China: A cointegration analysis. Energy Economics, 33(2), 284–291. https://doi.org/10.1016/j.eneco.2010.10.003
Janpolat, K., Odilova, S., Nodira, A., Salahodjaev, R., & Khachaturov, A. (2021). Financial development and energy consumption nexus in 32 belt and road economies. International Journal of Energy Economics and Policy, 11(2), 368–373. https://doi.org/10.32479/ijeep.10862
Kazar, A., & Kazar, G. (2016). Globalization, financial development and economic growth. International Journal of Economics and Financial Issues, 6(2), 578–587.
Lenka, S. K. (2015). Measuring financial development in India: A PCA approach. Theoretical and Applied Economics, XXII(1), 205–216.
Lenka, S. K., & Sharma, R. (2017). Does Financial Inclusion Spur Economic Growth in India? The Journal of Developing Areas, 51(3), 215–228. https://doi.org/10.1353/jda.2017.0069
Ma, X., & Fu, Q. (2020). The influence of financial development on energy consumption: Worldwide evidence. International Journal of Environmental Research and Public Health, 17(4). https://doi.org/10.3390/ijerph17041428
Mahmood, H. (2020). Impact of financial market development on the co2 emissions in GCC countries. Accounting, 6(5), 649–656. https://doi.org/10.5267/j.ac.2020.6.020
Mahmood, H., Alrasheed, A. S., & Furqan, M. (2018). Financial market development and pollution nexus in Saudi Arabia: Asymmetrical analysis. Energies, 11(12). https://doi.org/10.3390/en11123462
Mahmood, H., Furqan, M., & Bagais, O. A. (2019). Environmental accounting of financial development and foreign investment: Spatial analyses of East Asia. Sustainability (Switzerland), 11(1). https://doi.org/10.3390/su11010013
Maijama'a, R., & Musa, K. S. (2020). Crude Oil Price, Urbanization and Environmental Pollution in Nigeria: Evidence from ARDL Approach. Asian Journal of Economic Modelling, 8(4), 227–240. https://doi.org/10.18488/journal.8.2020.84.227.240
Mercan, M., & Gocar, Ä°. (2013). The Effect of Financial Development on Economic Growth in BRIC-T Countries: Panel Data Analysis. Journal of Economic and Social Studies, 3(1), 199–218. https://doi.org/10.14706/jecoss11318
Musa, K. S., Maijama'a, R., Shaibu, H. U., & Muhammad, A. (2019). Crude Oil Price and Exchange Rate on Economic Growth: ARDL Approach. OALib, 6(12), 1–5. https://doi.org/10.4236/oalib.1105930
Okoye, L. U., Omankhanlen, A. E., Okoh I, J., Ezeji, F. N., Ehikioya I, B., & Okoye, H. C. (2019). Examining Economic Growth Drivers in Nigeria. In Vision 2025: Education Excellence And Management Of Innovations Through Sustainable Economic Competitive Advantage (pp. 13295–13302).
Omri, A., Daly, S., Rault, C., & Chaibi, A. (2015). Financial development, environmental quality, trade and economic growth: What causes what in MENA countries. Energy Economics, 48, 242–252. https://doi.org/10.1016/j.eneco.2015.01.008
Orji, A., Ogbuabor, J. E., Nwosu, E., Anthony-Orji, O. I., & Isaac, S. T. (2019). Financial development, human capital and economic growth In Nigeria: An empirical analysis. Journal of Academic Research in Economics, 11(3), 507–531.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616
Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346. https://doi.org/10.1093/biomet/75.2.335
Rosalia, M.-R. G. (2013). Impact of Financial Development on Economic growth: Evidence from Latin America.
Shahbaz, M., Kumar Tiwari, A., & Nasir, M. (2013). The effects of financial development, economic growth, coal consumption and trade openness on CO2 emissions in South Africa. Energy Policy, 61, 1452–1459. https://doi.org/10.1016/j.enpol.2013.07.006
Shahbaz, M., & Lean, H. H. (2012). Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy, 40(1), 473–479. https://doi.org/10.1016/j.enpol.2011.10.050
Shahbaz, M., Solarin, S. A., Mahmood, H., & Arouri, M. (2013). Does financial development reduce CO2 emissions in Malaysian economy? A time series analysis. Economic Modelling, 35, 145–152. https://doi.org/10.1016/j.econmod.2013.06.037
Shahzad, S. J. H., Rehman, M. U., Hurr, M., & Zakaria, M. (2014). Do Economic and Financial Development Increase Carbon Emission in Pakistan: Empirical Analysis through ARDL Cointegration and VECM Causality. Munich Personal RePEc Archive.
Sulaiman, C. (2014). Financial Development and Inflation Nexus in Nigeria: Evidence from ARDL Bounds Testing. Research Journal of Finance and Accounting, 5(10), 50–56.
Sulaiman, C., & Abdul-Rahim, A. S. (2018). Population Growth and CO2 Emission in Nigeria: A Recursive ARDL Approach. SAGE Open, 8(2). https://doi.org/10.1177/2158244018765916
Tamazian, A., Chousa, J. P., & Vadlamannati, K. C. (2009). Does higher economic and financial development lead to environmental degradation: Evidence from BRIC countries. Energy Policy, 37(1), 246–253. https://doi.org/10.1016/j.enpol.2008.08.025
The World Bank. (2020). WORLD DEVELOPMENT INDICATORS. Retrieved from https://datatopics.worldbank.org/world-development-indicators/
Valickova, P., Havranek, T., & Horvath, R. (2015). Financial development and economic growth: A meta-analysis. Journal of Economic Surveys, 29(3), 506–526. https://doi.org/10.1111/joes.12068
Xiang, L., & Dongye, Y. (2016). Research on the Relationship between Financial Development and Economic Growth : Based on an Empirical Analysis of Shenzhen. Journal of Applied Finance & Banking, 6(4), 17–26.
Zhang, Y. J. (2011). The impact of financial development on carbon emissions: An empirical analysis in China. Energy Policy, 39(4), 2197–2203. https://doi.org/10.1016/j.enpol.2011.02.026
Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business and Economic Statistics, 10(3), 251–270. https://doi.org/10.1080/07350015.1992.10509904
Copyright (c) 2021 Kabiru Saidu Musa, Sulaiman Chindo, Rabiu Maijama'a
This work is licensed under a Creative Commons Attribution 4.0 International License.
JDE (Journal of Developing Economies) (p-ISSN: 2541-1012; e-ISSN: 2528-2018) is licensed under a Creative Commons Attribution 4.0 International License
- The journal allows the author to hold the copyright of the article without restrictions.
- The journal allows the author(s) to retain publishing rights without restrictions
- The legal formal aspect of journal publication accessibility refers to Creative Commons Attribution (CC BY)
