Financial development and environmental performance: evidence from the D8 and J7 member countries based on the Panel data approach

Financial development contributes to the development of environmental conditions of a country through decreasing investment cost, encouraging firms to apply environmentally friendly technologies and inputs and reducing the size of underground economy. Therefore, it is important to investigate the relationship between financial development and environmental pollution. This relationship might be different for developed and developing countries due to institutional differences. For the purpose of this study, two models were estimated based on the data from the D8 and J7 member countries from 1993 to 2013. Negative linear relationship was confirmed for the J7 countries and quadratic relationship i.e. Inverse U for the D8 countries which includes Iran. In J7 countries there is an inverse relationship between financial development and environmental destruction. However, in D8 counties, in the lower level of financial development, bank loans lead to environmental pollution, while in the 39 percent financial development indicator as a cut-off point this trend is reversed. Considering that in the last 5 years this ratio has been 50 percent for Iran, financial development through the aforementioned channels contributes to the reduction of environmental pollution.