The impact of financial stability on environmental degradation : Evidence for Africa

The primary objective of this article is to analyse the impact of financial system stability on environmental degradation, taking the specific characteristics of Africa into consideration. In order to accomplish this objective, the present study employs a panel of 47 countries (2000–2023) and an empirical approach founded upon a panel vector autoregressive (PVAR) model. This model is capable of accommodating the endogeneity and heterogeneity of the variables. The GMM method is employed to estimate the model parameters, thereby ensuring the robustness of the estimates, particularly in contexts where data exhibits endogeneity issues. A fundamental element of the methodology pertains to the analysis of impulse response functions, which are examined through the utilisation of Monte Carlo simulations. This approach facilitates the observation of both the short-term and long-term dynamics of the effects of shocks on financial stability and the environment. The primary findings suggest an ambivalent relationship. In certain instances, enhanced financial stability has been observed to stimulate investment in sustainable initiatives. However, a paucity of regulatory oversight can, conversely, give rise to deleterious practices. Finally, the recommendations made in the economic policy brief emphasise the need to strengthen governance, introduce strict regulation, and promote green and sustainable investment. The objective of these measures is to achieve a balance between economic development and environmental protection, whilst adapting financial policies to suit regional realities, thus ensuring inclusive and sustainable growth.