Do macroeconomic uncertainty and financial development cause environmental degradation? Evidence from an emerging economy

The main purpose of this paper is to empirically investigate the effect of macroeconomic uncertainty on environmental degradation in India over the period 1971–2016. Additionally, this paper considers the role of financial development, energy consumption intensity and economic growth in explaining the variation of environmental degradation in India.

The authors applied the power generalized autoregressive conditional heteroskedasticity model to measure inflation volatility and used it as a proxy for macroeconomic uncertainty. From a methodological perspective, the authors employ the autoregressive distributive lag bound testing model to establish the long-run equilibrium association between the variables. The Toda–Yamamoto causality approach has been used to examine the direction of causality between the variables.

Findings suggest that macroeconomic uncertainty exerts a positive effect on carbon emissions, indicating that higher inflation volatility, as a proxy for macroeconomic uncertainty, hinders India's environmental quality. Financial development, economic growth and energy consumption intensity have also adversely impacted environmental quality.

The negative association between macroeconomic uncertainty and environmental degradation calls for some stringent policy actions. While formulating policies to promote growth and maintain stability, policymakers and government stakeholders should take into account the environmental effects of macroeconomic policies. There is a need to implement more environmental-friendly technologies in the financial sector that could reduce carbon emission.

To the best of the authors' knowledge, this study is the first that considers the role of macroeconomic uncertainty along with financial development and energy intensity in an emerging economy like India.