This study aims to investigate the influence of institutional capacity on the relationship between financial development and environmental quality and also examines the moderating role of corruption on the link between institutional quality and environmental quality. By using yearly data from 33 developing countries for 7 years from 2011 to 2017, this paper applies a dynamic technique system GMM. The results suggest that financial development increases environmental degradation due to possible higher energy-intensive investment. However, institutional capacity moderates its impact on environmental quality by channelizing the funds to energy-efficient investment. The findings of this study suggest that financial development improves the environmental quality when institutional capacity is higher than 3.5 on the scale of 0 to 6. Interestingly, institutional capacity is unable to control environmental degradation in the presence of corruption. The results propose that financial development has a positive relation with environmental degradation in the presence of corruption. Nevertheless, relationship between institutional capacity and environmental degradation turns to negative when corruption improves in the economies. Furthermore, the findings show that institutional capacity may only control environmental degradation when corruption improves to 40 or higher on a scale of 0 to 100. The policy implications of this study are useful for policy departments, environmental regulatory bodies, and financial institutions.
Keywords: Corruption; Environmental quality; Financial development; Institutional capacity; System GMM.
© 2021. The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature.