Exploring the effect of economic growth and government expenditure on the environment

This paper examines the effect of economic growth and government spending on the environment using a panel of 71 countries for the time period 1970-2008. In particular, we test the hypothesis of the existence of an inverted U-shaped relationship between economic performance and pollution, as well as the hypothesis of a negative direct relationship between fiscal spending and pollution. To take into account that environmental degradation may respond to changes in income and government spending with a time lag, due to technological and institutional reasons, we apply appropriate dynamic econometric methods. We report the estimates for both the short-run and long-run effects on two different air pollutants, namely SO2 and CO2, distinguishing the results for different levels of economic development. Policy implications range depending on the level of income of the considered countries