The Impact of Financial Development Regimes on CO2 Emissions in Iran: The Markov-Switching Approach

In recent years, financial development and its effects on the environment have received increasing attention. Indeed, financial development directly affects economic growth and energy consumption, so that affects the release of environmental pollutants. On the other hand, developed financial markets and an efficient banking system improve productivity and reduce environmental pollutants. Therefore, the present paper investigates the impact of financial development on carbon dioxide emissions in Iran under regime conditions during the period 1971-2018.

In the present study, in order to investigate the effect of financial development on carbon dioxide emissions in Iran, the Markov-switching vector error correction method was used under regimes conditions.

The results showed that financial development under two regime conditions affects carbon dioxide emissions. This means that in the zero regime has a positive and significant effect on carbon dioxide emissions. While in regime one, financial development has a negative and significant impact on carbon dioxide emissions. Thus; Carbon dioxide emissions in Iran are affected by financial development regimes.

According to the results of financial development in different regimes have different effects on carbon dioxide emissions, so it is appropriate in situations where financial development reduces carbon dioxide emissions, strengthen financial development to achieve both economic growth and development and Environmental protection also happens.