Environmental Kuznets Curve: The Roles of Financial Development and FDI for the Case of Turkey

The aim of this thesis is to investigate the roles of financial development and foreign direct investments on conventional environmental Kuznets curve (EKC) for the case of Turkey. To this aim, thesis divided into two sections. In the first section, moderating role of financial development in conventional EKC is investigated by employing second-generation econometric procedures that consider multiple structural breaks in the series. First section includes two separate models for this purpose: (1) the main effects model and (2) the interaction effects model. The results of this investigation suggest a long-term equilibrium relationship between financial development and the EKC in Turkey, using both model options. Financial development has been found to moderate the effect of real output on carbon dioxide emissions in the shorter periods negatively, which signifies successful environmental performance and energy management. In comparison, financial development moderates the effect of real output on carbon dioxide emissions in the longer periods positively, and in which this finding again signifies that policies for energy savings and green house targets need to be established to target longer periods and energy management policies at higher levels of economic activity. The present thesis did not confirm a significant moderating effect of financial development on the impact of energy consumption on carbon dioxide emissions in the case of Turkey. In the second section, the relevance of the environmental Kuznets curve (EKC) hypothesis is investigated in Turkey for the period 1974–2010 using carbon dioxide (CO2) emissions, energy consumption, economic growth, and foreign direct investment (FDI) variables. The long-run equilibrium relationship among CO2 emissions, energy consumption, economic growth, and FDI is revealed using the bounds test. The error correction model under autoregressive-distributed lag mechanism suggests that CO2 emissions converge to their long-run equilibrium level by a 49.2% speed of adjustment every year by the contribution of energy consumption, economic growth, and FDI. The Toda–Yamamoto (1995) causality test results imply that carbon emissions and FDI, energy consumption, and CO2 emissions have bidirectional causal relationships. On the other hand, there are unidirectional causal relationships running from economic growth and energy consumption to FDI and from economic growth to energy consumption. Findings of this thesis provide evidence of the validity of the pollution haven hypothesis, in addition to the scale effect, and the EKC in the case of Turkey. Keywords: Air pollution, financial development, foreign direct investments, moderating role, causality.