Interactions among Financial Services, Informal Economies and Environmental Performance: Evidence from Developing Countries

This study conducts an empirical examination about the roles of financial development, informal economy, fossil fuel and renewable energy consumption on global environmental degradation. Turkey and India are selected as the sample countries to carry out a comparative analysis in the framework of Environmental Kuznets Hypothesis. To this aim, time series procedures are carried out by taking multiple structural breaks into account. Moreover, the study applied the Granger causality test under a vector error correction model to estimate the existence and direction of causality between the variables. The estimated results produced supporting evidence toward the validation of the Environmental Kuznets Curve (EKC) hypothesis. Coefficient estimates indicated that fossil fuel energy consumption, financial development and informal economy in both countries transmit a deteriorating impact on environmental well-being. Conversely, the presented evidence determined that the renewable energy consumption improves the environmental performance by reducing the CO2 emissions. The causality test results suggest that renewable energy consumption is financial development driven in the long run for Turkey and India. Based on the acquired results, this study provides a number of policy recommendations that can be considered to design more efficient economic and financial system in order to achieve energy security and sustainable global environment. Keywords: EKC hypothesis, Financial development, Informal economy, Renewable energy consumption, Environmental degradation, Time series analysis