Exploring renewable energy, financial development, environmental quality, and economic growth nexus: new evidence from composite indices for environmental quality and financial development

The association between trade, financial development, consumption of renewable energy, environmental quality, foreign direct investment, and economic growth is important for sustainable growth and environmental strategies. Hence, this research unveils this association in selected low- and high-income economies from 1996 to 2020. Unlike most of the previous literature, this study uses a composite environmental quality index, a composite financial development index, and a composite trade share measure to better represent environmental quality, financial development, and trade openness, respectively. The Continuously Updated Fully Modified and Continuously Updated Bias Corrected estimators along with the Dumitrescu Hurlin causality method are utilized to scrutinize the nature of the linkage between the modeled variables. The long-run estimation provided that consumption of renewable energy and environmental quality augment economic growth in high-income nations, while both these variables do not contribute to the economic growth in low-income countries. Financial development upsurges economic growth in high- as well as low-income nations. Interestingly, trade openness boosts economic growth in high-income countries, while in low-income countries, it obstructs economic growth. In causal linkage, the conservation hypothesis for low-income countries and the feedback hypothesis for high-income countries are confirmed in the context of consumption of renewable energy and economic growth association. The supply-leading hypothesis for low-income countries and the feedback hypothesis for high-income countries are supported regarding the financial development–economic growth nexus. Moreover, one-way causality from growth to environmental quality and bidirectional causality between environmental quality and economic growth for low- and high-income countries are established, respectively. Lastly, exhaustive environmental and economic policies are directed.