THE LINK BETWEEN FINANCIAL DEVELOPMENT AND ENVIRONMENTAL PERFORMANCE: AN EMPIRICAL ANALYSIS OF THE WORLD ECONOMY

Abstract

t The paper explores the link between financial development and environmental performance in the world economy. The cross-country regression including 173 countries is based on 2020 data on Environmental Performance Index (EPI) compiled by the experts of Yale University and 2019 Financial Development Index (FDI) data provided by IMF. The results show that financial development is positively associated with environmental performance and this positive relationship is more powerful in countries with low development of financial sector. It is also revealed a validated causality running from financial development to environmental performance in the world economy and also, in the group of well and less financial developed countries, respectively. The paper highlights the importance of the development level of financial sector for environmental sustainability, especially on ecosystem health. Paper's findings suggest an urgent call for appropriate policy measures in all countries, targeting the strengthening of financial institutions and markets (access, depth and efficiency). It is possible in this way for economies to be more empowered in the fight against the environmental degradation and for the improvement of environmental quality

Keywords

• financial development
• environment
• sustainability
• cross-section model