Do environmental technology and renewable energy improve financial development?  Evidence from G7 Countries

Gülbahar Atasever

doi:10.35208/ert.1727666

Authors

Gülbahar Atasever Mugla Sitki Kocman University, Department of Economics https://orcid.org/0000-0001-7244-9243

DOI:

https://doi.org/10.35208/ert.1727666

Keywords:

Renewable energy, environment-related technology, panel quantile method, G7

Abstract

This study reveals the impact of GDP per capita, trade openness, renewable energy and technology on financial development in the world's most developed countries for the period of 1990-2021. In this context, this study especially focused on whether environmental technologies and renewable energy support financial development. Driscoll-Kraay Panel regression analysis is used to estimate panel data in this study. In addition, panel quantile regression analysis is performed to determine the coefficients of the variables at different quantile. The long-run results are authenticated using panel fully modified ordinary least square (FMOLS), dynamic ordinary least square (DOLS) and canonical cointegration regression (CCR). It is concluded that increases in renewable energy consumption and environment-related technology reduce financial development in the long-run. Although many studies found that financial development has positive effects on renewable energy consumption, the feedback effect is negatively in G7 countries to current study. In other words, policy incentives should be provided to return the productive resources created by financial instruments used in renewable energy investments back to the financial system and balance financial growth between environmental sustainability. The results suggest that financial markets should be regulated to obtain the positive effects of environmentally friendly investments. In this respect, this study signals that we have entered a period in which financial markets need to be reorganized.

Downloads

Download data is not yet available.

References

[1]. R. Levine, “Financial development and economic growth: Views and agenda”, Journal of Economic Literature, Vol. 35(2), pp. 688-726, 1997.

[2]. Po-H. Hsu, X. Tian, and Y. Xu, “Financial development and innovation: Cross-country evidence”, Journal of Financial Economics, Vol. 112(1), pp. 116-135, 2014.

[3]. H. Khan, I. Khan, and T.T. Binh, “The heterogeneity of renewable energy consumption, carbon emission and financial development in the globe: A panel quantile regression approach”, Energy Reports, Vol. 6, pp. 859-867, 2020.

[4]. D. Acemoglu, P. Aghion, and F. Zilibotti, “Distance to frontier, selection, and economic growth”, Journal of the European Economic Association, Vol. 4(1), pp. 37-74, 2006.

[5]. D.H., Vo, Q. Tran, and T. Tran, “Economic growth, renewable energy and financial development in the CPTPP countries”, Plos One, Vol. 17(6), 2022.

[6]. K.L. Gold, and F. Tregenna, “Financial development, green innovation, green tax, industrialisation, and environmental performancein South Afrika: The mediating role of institutions”, Journal of Environmental Management, Vol. 393. 126942, 2025.

[7]. E.B. Yıldırım, and Z. Şenol, “Finansal gelişme ile yenilenebilir enerji tüketimi arasindaki ilişki”, International Journal of Economics, Politics, Humanities & Social Sciences, Vol. 7(1), pp. 12-29, 2024.

[8]. W. Wang, M. Imran, K. Ali, and A. Sattar, “Green policies and financial development in G7 economies: An in-depth analysis of environmental regulations and green economic growth”, in Natural Resources Forum, pp. 1-27, 2024.

[9]. Green Central Banking, “G7 banks’ financed emissions exceed those of several member countries combined”, Available at: https://greencentralbanking.com/2024/05/21/g7-banks-financed-emissions-report/ Accessed April 08, 2025.

[10]. H. Yu, R. Nazir, J. Huang, and H. Li, “Linkages between renewable energy, financial development, and environmental sustainability in Asian countries”, Economic Research, Vol. 36(3), pp. 1-18, 2023.

[11]. A.M. Kutan, S.R., Paramati, M., Ummalla, and A. Zakari, “Financing renewable energy projects in major emerging market economies: Evidence in the perspective of sustainable economic development”, Emerging Markets Finance and Trade, Vol. 54(8), pp. 1761-1777, 2018.

[12]. S.G. Anton, and A.E.A. Nucu, “The effect of financial development on renewable energy consumption. A panel data approach”, Renewable Energy, Vol. 147(1), pp. 330-338, 2020.

[13]. D. Guan, U. Comite, M.S. Sial, A. Salman, B. Zhang, S.B. Gunnlaugsson, U. Mentel, and G. Mentel, “The impact of renewable energy sources on financial development, and economic growth: The empirical evidence from an emerging economy”, Energies, Vol. 14(23), Article 8033, 2021.

[14]. A. Khan, Y. Chenggang, J. Hussain, and Z. Kui, “Impact of technological innovation, financial development and foreign direct investment on renewable energy, non-renewable energy and the environment in Belt & Road Initiative countries”, Renewable Energy, Vol. 171, pp. 479-491, 2021.

[15]. L. Zhe, S. Yüksel, H. Dinçer, S. Mukhtarov, and M. Azizov, “The positive influences of renewable energy consumption on financial development and economic growth”, SAGE Open, Vol. 11(3), 2021.

[16]. S. Mukhtarov, S. Yüksel, and H. Dinçer, “The impact of financial development on renewable energy consumption: Evidence from Turkey”, Renewable Energy, Vol. 187, pp. 169-176, 2022.

[17]. C. Demirtas, A.K. Tiwari, E.S., Yıldırım, and M. Shahbaz, “Does financial development support renewable energy consumption: Evidence from the UK”, Renewable Energy, Vol. 243, Article 122480, 2025.

[18]. C.O. Olaniyi, M.A.S. Al-Faryan, and E.O. Ogbaro, “Do institutional quality and its threshold matter in the sensitivity of the renewable energy transition to financial development? New empirical perspectives”, International Journal of Finance & Economics, Vol. 30, pp. 5-43, 2025.

[19]. M. Shahbaz, M.A. Destek, and M.L. Polemis, “Do foreign capital and financial development affect clean energy consumption and carbon emissions? Evidence from BRICS and Next-11 countries”, Journal of Economics and Business, Vol. 68, pp. 20-50, 2018.

[20]. R Wang, N. Mirza, D.G. Vasbieva, Q. Abbas, and D. Xiong, “The nexus of carbon emissions, financial development, renewable energy consumption, and technological innovation: What should be the priorities in light of COP 21 Agreements?”, Journal of Environmental Management, Vol. 271, Article 111027, 2020.

[21]. J. Wang, S. Zhang, and Q. Zhang, “The relationship of renewable energy consumption to financial development and economic growth in China”, Renewable Energy, Vol. 170, pp. 897-904, 2021.

[22]. K.S. Yazdi, and B. Shakouri, “The globalization, financial development, renewable energy, and economic growth”, Energy Sources, Vol.12(8), pp.707-714, 2017.

[23]. O. Saygin, and O. Iskenderoglu, “The nexus between financial development and renewable energy consumption: a review for emerging countries”, Environmental Science and Pollution Research, Vol.29, pp.14522-14533, 2022.

[24]. C. Azmeh, and M. Al-Raeei, “Financial development, research in finance, and economic growth”, Cogent Economics & Finance, Vol. 13(1), 2448220, 2025.

[25]. C. Demirtas, A.K. Tiwari, E.S. Yıldırım, and M. Shahbaz, “Does financial development support renewable energy consumption: Evidence from the UK”, Renewable Energy, Vol.243, 122480, 2025.

[26]. W. Wang, M. Imran, K. Ali, and A. Sattar, “Green policies and financial development in G7economies: An in-depth analysis of environmentalregulations and green economic growth”, Natural Resources Forum, Vol. 49(2), pp.1081-1107, 2025.

[27]. K. Abbass, N. Amin, F. Khan, H. Begum, and H. Song, “Driving sustainability: The nexus of financial development, economic globalization, and renewable energy in fostering a greener future”, Energy & Environment, pp.1-23, 2025.

[28]. F. Ganda, “The interplay between technological innovation, financial development, energy consumption and natural resource rents in the BRICS economies: Evidence from GMM panel VAR”, Energy Strategy Reviews, Vol.51, 101267, 2024.

[29]. P. Bongini, M. Iwanicz-Drozdowska, P. Smaga, and B. & Witkowski, “Financial development and economic growth: The role of foreign-owned banks in CESEE countries”, Sustainability, Vol.9(3), 335, 2017.

[30]. A. Zagorchev, G. Vasconcellos, and Y. Bae, “Financial development, technology, growth and performance: Evidence from the accession to the EU”, Journal of International Financial Markets, Institutions & Money, Vol. 21, pp. 743-759, 2011.

[31]. G. Saint-Paul, “Technological choice, financial markets and economic development”, European Economic Review, Vol. 36(4), pp. 763-781, 1992.

[32]. A. Khan, “Financial development and economic growth”, Macroeconomic Dynamics, Vol. 5(3), pp. 413-433, 2001. Y. Huang, and J. Temple, “Does external trade promote financial development?” in CEPR Discussion Papers, 2005.

[33]. Y. Huang, and J. Temple, “Does external trade promote financial development?” in CEPR Discussion Papers, 2005.

[34]. H. Svaleryd, and J. Vlachos, “Markets for risk and openness to trade: how are they related?” Journal of International Economics, Vol. 57, pp. 369-395, 2002.

[35]. Q.-T. Do, and A.A. Levchenko, “Comparative advantage, demand for external finance, and financial development”, Journal of Financial Economics, Vol. 86, pp. 796-834, 2007.

[36]. D-H. Kim, S-C. Lin, and Yu-Bo, Suen, “Dynamic effects of trade openness on financial development”, Economic Modelling, Vol. 27(1), pp. 254-261, 2010.

[37]. C. Zhang, Y. Zhu, and Z. Lu, “Trade openness, financial openness, and financial development in China”, Journal of International Money and Finance, Vol. 59, pp. 287-309, 2015.

[38]. C.H.P. Ho, N.N.T. Pham, and K.T. Nguyen, “Economic growth, financial development, and trade openness of leading countries in ASEAN”, Journal of Asian Finance, Economics and Business, Vol. 8(3), pp. 0191-0199, 2021.

[39]. I.M. Sghaier, “Trade openness, financial development and economicgrowth in North African countries”, International Journal of Finance & Economics, Vol. 28(2), pp. 1729-1740, 2023.

[40]. E. Renaldi, “The impact of trade openness, GDP per capita, government spending, and banking sector development on financial development in ASEAN-5 countries”, Jurnal Volatility, Vol. 1(2), pp. 130-142, 2024.

[41]. T.H. Le, C.P. Nguyen, and D. Park, “Financing renewable energy development: Insights from 55 countries”, Energy Research & Social Science, Vol. 68, Article 101537, 2020.

[42]. Q. Wang, and Z.Q. Dong, “Does financial development promote renewable energy? Evidence of G20 economies”, Environmental Science and Pollution Research, Vol. 28, pp. 64461–64474, 2021.

[43]. D. Comin, and R. Nanda, “Financial development and technology diffusion”, IMF Economic Review, Vol. 67, pp. 395-419, 2019.

[44]. C-Y. Cheng, M-S. Chien, and C-C. Lee, “ICT diffusion, financial development, and economic growth: An international cross-country analysis”, Economic Modelling, Vol. 94, pp. 662-671, 2021.

[45]. S. Asongu, E. Batuo, J. Nwachukwu, and V. Tchamyou, “Is information diffusion a threat to market management”, Journal of Multinational Financial Management, Vol. 45, pp. 88-104, 2018.

[46]. M-S. Chien, C-Y. Cheng, and M.A. Kurniawati, “The non-linear relationship between ICT diffusion and financial development”, Telecommunications Policy, Vol. 44(9), Article 102023, 2020.

[47]. M. Yu, H. Jin, H. Zhang, and A.Y.L. Chong, “ICT, Financial Development and Renewable Energy Consumption”, Journal of Computer Information Systems, Vol. 63(1), pp. 190–203, 2022.

[48]. World Bank, “World Development Indicators”, 2021. Available at: https://databank.worldbank.org/, Accessed April 12, 2025.

[49]. International Monetary Fund, IMF, Available at: https://www.imf.org/, Accessed March 22, 2025.

[50]. Organisation for Economic Co-operation and Development, OECD, 2024, https://www.oecd.org/, Accessed March 22, 2025.

[51]. J. Westerlund, “Testing for error correction in panel data”, Oxford Bulletin of Economics and Statistics, Vol. 69(6), pp. 709-748, 2007.

[52]. P.C.B. Phillips, and B.E. Hansen, “Statistical inference in instrumental variables regression with I(1) processes”, The Review of Economic Studies, Vol. 57(1), pp. 99-125, 1990.

[53]. J.Y. Park, “Canonical cointegrating regressions”, Econometrica, Vol. 60(1), pp. 119-143, 1992.

[54]. J.H. Stock, and M.W.A. Watson, “Simple estimator of cointegrating vectors in higher order integrated systems”, Econometrica, Vol. 61(4), pp. 783-820, 1993.

[55]. J. Driscoll, and A.C. Kraay, “Consistent covariance matrix estimation with spatially dependent data”, The Review of Economics and Statistics, Vol. 80(4), pp. 549-560, 1998.

[56]. D. Hoechle, “Robust standard errors for panel regressions with cross-sectional dependence” The Stata Journal, Vol. 7(3), pp. 281-312, 2007.

[57]. W.K. Newey, and K.D. West, “A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix”, Econometrica, Vol. 55(3), pp. 703-708, 1987.

[58]. M.H. Pesaran, and T. Yamagata, “Testing slope homogeneity in large panels” Journal of Econometrics, Vol. 142(1), pp. 50–93, 2008.

[59]. M.H. Pesaran, “General diagnostic tests for cross section dependence in panels” IZA Discussion Paper, 1240, 2004.

[60]. M. Friedman, “The use of ranks to avoid the assumption of normality implicit inthe analysis of variance”, Journal of American Statistical Association, Vol. 32(200), pp. 675-701, 1937.

[61]. E.W. Frees, “Assessing cross-sectional correlation in panel data”, Journal of Econometrics, Vol. 69(2), pp. 393-414, 1995.

[62]. A. Haldar, and N. Sethi, “Effect of institutional quality and renewable energy consumption on CO2 emissions an empirical investigation for developing countries”, Environmental Science and Pollution Research, Vol. 28(12), pp. 15485-15503, 2021.

[63]. M.H. Pesaran, “A simple panel unit root test in the presence of cross-section dependence”, Journal of Applied Econometrics, Vol. 22(2), pp. 265-312, 2007.

[64]. T.S. Breusch, and A.R. Pagan, “The Lagrange multiplier test and its applications to model specification in econometrics”, The Review of Economic Studies, Vol. 47(1), pp. 239-253, 1980.

[65]. J.M. Wooldridge, Econometric analysis of cross section and panel data, MIT Press, Cambridge. 2002.

Do environmental technology and renewable energy improve financial development? Evidence from G7 Countries

Authors

DOI:

Keywords:

Abstract

Downloads

References

Downloads

Published

How to Cite

Issue

Section

License

Submit Your Manuscript

Indexing

Announcements

Keywords

Publisher

License

Support