Threshold impact of financial development on the composite environmental quality index with emphasis on the role of research and development: using multi-criteria decision makin and principal component analysis

The purpose of this paper is to apply a composite index for environmental quality to investigate the threshold impact of financial development on this composite index; Because the use of this composite index, which includes all dimensions of environmental pollution, can provide more accurate results for us in this study.

In order to rech the research goals, annual data for selected OPEC countries over the period of 2000 to 2019 and Panel Smooth Transition Regression (PSTR) approach are used. Firstly, a composite environmental quality index is created as a dependent variable in the model and then, the pre-estimations (including cross-sectional dependence, second-generation unit root, nonlinear association existence, no-remaining nonlinear association existence) are investigated. Finally, the threshold impact of financial development on environmental quality are estimated.

The results indicate a non-linear relationship between the studied variables. According to the test of no-remaining nonlinear association, the inclusion of a transfer function with a threshold parameter which is representing a two-regime model, is recommended to determine the nonlinear relationship between variables. Financial development (bank- and market-oriented) in first regime have a positive effect, but by crossing of threshold and entering to second regime it has negative effect on environmental quality. Accordingly, there is a U-shaped relationship between financial development and environmental quality. Given the relationship between economic growth and environmental quality in the two regimes, the Environmental Kuznets Curve (EKC) hypothesis is also confirmed. The trade openness and, research and development expenditures in both regimes have negative and positive effects on the composite environmental quality index, respectively.

Based on the results, some policy suggestions and new recommendations are presented for future studies, which would contribute to the better implementation of economic–environmental policies.