Do fiscal policy and economic growth improve or harm the environment? An empirical analysis with a Bayesian approach and threshold estimation in one of the emerging and growth-leading economies

Abstract

As one of the Emerging and Growth-Leading Economies (EAGLES), Vietnam is maintaining rapid economic development at the cost of environmental degradation. However, the impact of economic growth and the role of fiscal policy tools in Vietnam’s pollution equation remains unclear. This study uses a Bayesian approach and threshold estimation to quantitatively assess the relationship between economic growth, fiscal policy tools, and environmental degradation in Vietnam from 1990 to 2021. The results indicate that tools of the fiscal policy significantly contribute to environmental degradation, with government expenditure having a greater impact than taxation. Economic growth exhibits a U-shaped relationship with degradation, implying the existence of an inverted Environmental Kuznets Curve (EKC) hypothesis in a transitional economy. In the early stages of Vietnam’s development, characterized by an agricultural economy, economic growth positively affected the environment. However, economic growth exacerbates environmental degradation in the pre-industrialization and industrialization phases. Diagnostic tests are also applied to confirm the reliability and validity of the empirical estimates, providing valuable insights for proposed policy implications in the study.

Keywords

• Bayesian
• fiscal policy
• EKC
• environment
• economic growth
• C11