Asymmetric Effects of Fiscal Policy and Foreign Direct Investment Inflows on CO2 Emissions – an Application of Non-Linear Ardl

Research on the impact of fiscal policy and foreign direct investment (FDI) on environmental quality has yielded conflicting results regarding their effects on carbon dioxide emissions. To further explore the asymmetric influences of these two critical factors on environmental quality, we employ a nonlinear ARDL approach to examine how fiscal policy (GOEX), FDI inflows, and other drivers of CO2 emissions, such as trade openness, financial development, and economic growth, affect environmental quality in Vietnam from 1990 to 2022. Our findings indicate that a positive shock in GOEX results in decreased emissions, whereas a negative shock in GOEX leads to increased emissions, challenging previous research suggesting that higher expenditures typically harm the environment. We also observe that positive changes in FDI result in higher CO2 emissions, whereas negative FDI shifts have no statistically significant impact. Additionally, our study revealed that trade openness improves environmental conditions, whereas economic growth and financial development contribute to increased CO2 emissions. The responses of CO2 emissions to the asymmetric effects of fiscal policy, FDI inflows, and other determinants in the short run last in the long run. These insights are valuable for policymakers to develop environmental sustainability strategies to mitigate climate change by addressing fiscal policies and other determinants of CO2 emissions.