Financial Development, Environmental Quality and Economic Growth

In this study, the relationships between financial development, environmental quality and economic growth are studied based on data from 102 countries over the period 1980-2010 using the generalized method of moments (GMM) estimation. The econometric results show the following three basic conclusions: First, both financial development and environmental quality have a significant impact on economic growth and should be included in the production function of the economic growth model as important variables. Second, there is a significant and robust inverted U-shaped relationship between financial development and economic growth; with the improvement of the level of financial development, economic growth would first increase and then decrease, which is consistent with the results of previous studies. Third, there is also a significant and robust inverted U-shaped relationship between economic growth and carbon emissions, indicating that there exists a critical point at which achieving economic growth comes at the expense of environmental quality, and after passing the critical point, the deterioration of environmental quality will lead to a significant slowdown in economic growth. In addition, the econometric analysis in this paper also shows that there was a mutually promoting and strengthening relationship between financial development and environmental quality. Specifically, the degree of financial development can further strengthen the promoting effect of environmental quality on economic growth; meanwhile, an improvement in environmental quality can also strengthen the promoting effect of financial development on economic growth. Financial development and environmental quality could influence economic growth through strengthening the marginal product effects of capital and labor, which further indicates the that both financial and environmental factors play an important role in modern economic development.