Environmental quality and output volatility: the case of South Asian economies

This study explores the impact of environmental degradation on output volatility for eight South Asian economies over the time span 1971-2017. Environmental degradation is measured by CO₂ emissions, nitrous oxide (N₂O), methane emissions (CH₄), greenhouse gas emissions (GHG), and environmental pollutants index (EPI), whereas output volatility is constructed using a rolling window of five-year moving standard deviation. The results of cross-sectional dependence (CSD) tests indicate the presence of CSD among South Asian economies. For empirical analysis, second-generation panel time series approaches are employed. Also, the findings of panel unit root tests (URTs) signify that the variables are stationary at the first difference and have a long-run relationship. Westerlund cointegration test is used to assess the long-run relationship among the variables. Moreover, this study has used a fully modified ordinary least square (FMOLS) and dynamic modified ordinary least square (DOLS) methods to examine the relationship between environmental degradation and output volatility. In the long run, all indicators of environmental degradation are positive and significant signaling the harmful effects of environmental degradation on output volatility. However, the impact of nitrous oxide is larger relative to other indicators used in the study. The outcome, therefore, suggests that promoting clean investment in nitric acid plants might help improve the environmental quality in the region which in turn fosters the process of economic stability.