Financial Sector Development and Testing the Environmental Kuznets Curve (EKC) Hypothesis through a PCHVAR specification for the Middle Eastern Region

Abstract This research aims to investigate the presence of environmental Kuznets curve hypothesis while considering the financial sector variables such as financial innovation, financial inclusion, and financial development on the environmental quality as well as achieving the energy efficiency in the Middle Eastern region. Current research employs a panel conditionally homogenous autoregressive (PCHVAR) specification for the annual dataset covering the time 2001–2021. The estimates reveal that in the short run, economic growth and financial sector variables adversely affect the environment quality by emitting more greenhouse gases whereas in the long run, higher economic growth and developed financial sector help to improve the quality of the environment and energy efficiency. These findings are also verified through the Granger causality test. This research provides insights to establish long term policies for facilitating investments in green technology and energy conservation in the Middle Eastern Region.