Does financial openness increase environmental degradation? Fresh evidence from MERCOSUR countries

This article researches the impact of financial openness on environmental degradation in the MERCOSUR countries over the time spanning from 1980 to 2014. The Panel Autoregressive Distributed Lag (PARDL), in the form of Unrestricted Error Correction Model (UECM), was computed with the purpose of decomposing the total effects of variables in their short- and long-run ones. The results of short-run impacts and elasticities of PARDL model showed that the financial openness increases the CO₂ emissions both in the short- and in the long-run. Moreover, the results also support that economic growth, consumption of primary energy, and agricultural production are responsible for an increase of emissions in the MERCOSUR countries. Therefore, these empirical findings will help expand the literature that assesses the impact of financial development on the environment. The results also point out to the need of policymakers to change the way the energy mix is financed.