Asymmetric Effects of Financial Development on CO2 Emissions in Bangladesh

Abstract

Depending on how it functions and is organized, the financial system can have a negative, positive, or zero impact on the environment. For Bangladesh, the empirical relationship between financial development and the environment, measured in terms of carbon dioxide (CO2) emissions per capita, is analysed over the period 1980 to 2020. This is the first such analysis for this country. We perform this within a non-linear bound testing framework while controlling for changes in energy consumption, gross domestic product, and trade volume. There are two key findings. One, we find that the relationship between CO2 emissions per capita and financial development is cointegrating, with the direction of cointegration running from financial development to CO2 emissions. Two, we find that positive and negative changes in financial development have asymmetric impacts on CO2 emissions in the long and short run. The implications of these findings are discussed regarding their attendant environmental policy implications.