Financial Development and Economic Growth Nexus in Emerging Economies: The Role of National Security, Environmental Sustainability and Green Bonds

Abstract

This study investigates financial development and economic growth and moderated for the role of national security, environmental sustainability and green bonds in the emerging economies using annual time series data which covered the period of 2000 to 2022, panel differenced and system generalized method of moment (GMM) as the baseline model as well as fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) as the models for robustness checks. Financial development was stratified into financial development – financial institution access index and financial institution depths index and financial markets – measured with financial markets access index and financial markets depths index. Also, national security were measured with military expenditure, global peace index and global terrorism index, environmental sustainability was measured with indicators such as ecological footprint, biodiversity index and renewable energy share, while the green bonds were measured with environmental protection expenditure and carbon footprint of bank loans as we controlled for climate change and foreign remittances. Findings from the GMM results revealed that while financial development and green bonds shows positive and significant effects on the economic growth in the emerging economies, the national security had negative effects, while the environmental sustainability had significant negative and positive effects on the economic growth of the emerging economies and similar findings were made from the results of the robustness checks (FMOLS) and (DOLS). Also, from the results of the interactive effects financial development with national security, environmental sustainability green bonds, we found that the variables had significant effects on the economic growth. In addition, findings from the marginal effects (ME) and threshold effects (TH) results revealed that while financial development improves economic growth, additional effects of national security, environmental sustainability and green bonds may have adverse effects on the economic growth in the emerging economies at a certain threshold. Based on these findings, this study recommends that financial development, national security and environmental sustainability should be improved by the authorities to forestall economic growth in the emerging economies.