The Nexus between Carbon Emissions, Energy Use, Economic Growth and Financial Development: Evidence from Central and Eastern European Countries

The aim and novelty of this study consist of estimating the nexus between CO2 (carbon dioxide) emissions, energy use, economic growth, and financial development for ten Central and Eastern European countries (CEEC) over the 2000-2017 period, starting from Environmental Kuznets Curve (EKC) theory. The Fully Modified Ordinary Least Squares (FMOLS) method was used for testing the cointegration relationship. Granger causality estimation based on the Vector Error Correction Model (VECM) and Pairwise Granger causality test were applied to identify the causality relationships between the variables and to identify the direction of causality. The implementation of the tests led to significant conclusions. In the long run, the levels of CO2 emissions and energy use do not have any influence on economic growth. Furthermore, there is a bidirectional causality among economic growth in terms of GDP and financial development variables. Thus, increasing financial development will generate more CO2 emissions and more energy use, and increasing economic growth will lead to rising financial development. In the short run, increasing financial development will generate more CO2 emissions and will lead to increased energy use and economic growth. Also, a bidirectional causality is being revealed between financial development and CO2 emissions. This indicates that financial development may help to reduce CO2 emissions.