FINANCIAL DEVELOPMENT AND ENVIRONMENTAL QUALITY: EVIDENCE FROM SRI LANKAN PERSPECTIVE.

Abstract

The effect of financial development on CO2 emissions has not been fully addressed in existing literature and CO2 emissions are connected to environmental challenges, posing a significant barrier to sustainable development. This unsolved issue is common in both developed and developing countries. As a developing country perspective, this study attempts to determine the impact of financial development on environmental quality in Sri Lanka, employing time series data covering the period of 1990-2021. The Autoregressive Distributed Lag Model (ARDL) is manipulated for the empirical investigation. The financial development is assessed through the financial market and institutional development. Alongside this, environmental quality is captured through CO2 emissions. Further, economic growth, energy consumption, and trade openness are employed as control variables in the model. The findings reveal that financial market development and energy consumption contribute to reduced environmental quality in Sri Lanka. Further, results show that economic growth can improve the environmental quality in the country. The outcomes of the study recommend that the policies should be implemented to minimize the ecological concerns of market-based financial development and energy consumption. In contrast, economic growth policies must be balanced and strengthened to maintain the environmental quality in the country.