The influence pathways of financial development on environmental quality: New evidence from smooth transition regression models

Abstract

Understanding the influence pathways of financial development on environmental quality is necessary for policy makers in China to improve the quality of the environment through financial means; however, these points have not been systematically discussed in the literature. Therefore, to fill this gap and depict these indirect influence pathways in regions with different financial development levels, this paper categorizes the Chinese provinces based on their financial development levels and a panel smooth transition regression model is used to analyze province-level data in China over the period from 2001-2017. The different indirect impacts of financial development on environmental quality through the pathways under different financial development levels are identified and the transformation speed of the intensity of these impacts can be determined. The results indicate that (1) financial development has significant indirect impacts on environmental pollution through various pathways, and the impacts of these pathways are different in the various regions with low or high levels of financial development. (2) In the regions with poor financial development, insufficient financial development could indirectly result in environmental contamination through the pathways that involve stimulating economic growth and promoting the development of secondary and tertiary industries. (3) In regions with relatively high levels of financial development, financial development has mixed effects on environmental pollution, i.e., improving environmental quality by promoting technological innovation and attracting foreign direct investment and decreasing environmental quality by supporting secondary and tertiary industries. Local governments should consider the different characteristics of regional financial development when formulating environmental protection policies.

Keywords: Financial development, Environmental quality, Indirect impact, Panel smooth transition regression models

JEL Classification: Q1