ABSTRACT
This study conducts a comparative analysis of financial development and ecological footprint nexus according to income levels using a novel index of ecological quality for a large panel of countries from 1971 to 2017. The empirical analysis is conducted using panel data estimators. The study employs three measures of financial development, namely, “domestic credit to private sector, domestic credit to the private sector by banks and domestic credit provided by the financial sector.” The results reveal that the effects of financial development on environment are heterogeneous across different groups of countries. Financial development improves quality of the environment by reducing the ecological footprint in high-income countries, whereas it decreases the quality of environment in middle-income and low-income countries. This research also confirms the validity of “pollution haven hypothesis.” The results have diverse implications for the global economy. Environmental effects of financial development are conditional on development stage of countries and financial institutions’ priorities for environmental quality.
