Does Good Governance Moderate the Financial Development-CO2 Emissions Relationship?
Abstract This inquiry contributes to the previous literature by analyzing the empirical linkage between the development of the financial sector and carbon emissions in the presence of good governance. Specifically, we examine the ability of good governance in moderating the negative effect of financial development on environmental quality in the case of Saudi Arabia over the period 1996-2016. Different indicators of financial development and governance quality are included in the analysis. Using Dynamic Ordinary Least Squares (DOLS) estimator, we find that (i) an unconditional effect of the three indicators of financial development on increasing carbon emissions in the most models; (ii) the conditional impact of the indicators of governance quality increases carbon emissions in the most models; (iii) the interactions between the indicators of governance and the indicators of financial development are negative and statistically significant only in the models pertaining to political and institutional governance, meaning that the development of financial sector reduces carbon emissions if it is accompanied by good institutional and political governance.