The impact of economic policy uncertainty on PM2.5 pollution—evidence from 25 countries

Abstract

We conduct theoretical and empirical study on the impact of economic policy uncertainty on PM2.5 pollution. Economic policy uncertainty has important impact on PM2.5 pollution through investment channel and innovation channel. Specifically, according to real option theory, increase in economic policy uncertainty can reduce investment, thereby reducing PM2.5 pollution. However, increase in economic policy uncertainty can hinder corporate’s innovation activities, which in turn make PM2.5 pollution increase. Therefore, the impact of economic policy uncertainty on PM2.5 pollution depends on the combination effect of these two different effects. Furthermore, using 25 countries’ unbalanced panel data and fixed effects estimation methods, we empirically test the impact of economic policy uncertainty on PM2.5 pollution. The results show that, with the increase of economic policy uncertainty, countries’ PM2.5 pollution has significantly decreased. In addition, economic policy uncertainty has heterogeneous effect on countries’ PM2.5 pollution. Compared with countries who have higher R&D input, increase in economic policy uncertainty makes the reduction of PM2.5 pollution in countries with relatively lower R&D input higher. By changing the measurement methods of economic policy uncertainty and PM2.5 pollution indicators, and using 2SLS methods to estimate the models, the conclusions of the paper are robust. Finally, we put forward corresponding policy implications.