Does Financial Development Reduce CO2 Emissions in Malaysian Economy? A Time Series Analysis

Abstract: This study deals with the question whether financial development reduces CO2 emissions or not in case of Malaysia. For this purpose, we apply the bounds testing approach to cointegration for long run relations between the variables. The study uses annual time series data over the period 1971-2008. Ng-Perron stationarity test is applied to test the unit root properties of the series. Our results validate the presence of cointegration between CO2 emissions, financial development, energy consumption and economic growth. The empirical evidence also indicates that financial development reduces CO2 emissions. Energy consumption and economic growth add in CO2 emissions. The Granger causality analysis reveals the feedback hypothesis between financial development and CO2 emissions, energy consumption and CO2 emissions and, between CO2 emissions and economic growth. The present study provides new sights for policy making authorities to use financial sector as an instrument to decline energy emissions