Exploring determinants of financial system and environmental quality in high-income developed countries of the world: the demonstration of robust penal data estimation techniques

The financial system development has got considerable attention due to its association with the environment of the country. To address the apprehension of the researchers about the effect of the determinants of the financial system on the environmental quality of high-income developed countries, we analyze the data of twenty developed countries with sound and strong financial systems for the period 2001 to 2018. We consider both banking development and stock market development as the main key determinants of the financial system. We employ numerous modern-day penal data estimation techniques, namely Dynamic Penal GMM in both linear and non-linear form, Common Correlated Effect Mean Group (CCEMG), and Dynamic Fixed Effect for capturing the issues of heterogeneity, endogeneity, and cross-sectional dependence. Our results show that banking development substantiates the environmental quality in high-income developed countries. The positive gesture of the banking development on environmental quality could be the reason for the established environmentally friendly policies in the developed part of the world. Hence, we conclude that banking development in high-income developed countries significantly reduces the emissions of dangerous gases, which resultantly enhances the environmental quality. The study reveals an insignificant and tenuous impact of the market development on the environmental quality that might be due to the adoption of cleaner technologies by firms in the developed world that are environmentally friendly. The results of our long-term estimations also predict the significant effect of banking development and an insignificant effect of the market development on environmental quality. In addition, our results also demonstrate an inverted U-shaped relationship of the determinants of the financial system and environmental quality. More institutional and legal initiatives must be made for a more robust banking and stock market development framework by the policy makers with a view to substantiating the quality of the environment to a more sustainable level in the developed world.