Financial instability and environmental degradation: Evidence from South Asia

This study examines the impact of financial instability (FI) on environmental degradation (ED) along with economic growth (EG), foreign direct investment (FDI), and energy consumption (EC) in five South Asian economies from 1980 to 2021. The study uses a fixed-effect panel model and a two-step system GMM for robust outcomes. The empirical findings demonstrate that FI has a positive and significant effect on ED in South Asian economies. However, the impact of FI on ED varies across South Asian countries. Overall, the impacts of EG, FDI, and EG are positive and significant on ED in South Asia. The effects of EG, FDI, and EG are also heterogeneous for countries in South Asia. However, FDI reduces ED in Pakistan, Bangladesh, and India. Therefore, the study provides several policy recommendations to combat ED in the South Asian region.