The impact of financial development and trade on environmental quality in Iran

Undesirable changes in the environment such as global warming and emissions of greenhouse gases have elicited worldwide attention in recent decades. Environmental problems emanating from economic activities targeted at achieving higher economic growth rate have become a controversial issue. In this study, the effects of financial development and trade on environmental quality in Iran were investigated. To this purpose, statistical data collected between the periods of 1970 and 2011 were used. In addition to using the autoregressive distributed lag model (ARDL), the short-term and long-term relationships between the variables were estimated and analyzed. Moreover, the environmental Kuznets curve (EKC) hypothesis was evaluated using various pollutants. The results show that financial development accelerates the degradation of the environment; however, an increase in trade openness reduces the damage to the environment in Iran. Furthermore, the results did not agree with the EKC hypothesis in Iran. Error correction coefficient showed that in each period, 49% of imbalances were justified and approached their long-run procedure. Structural stability tests showed that the estimated coefficients were stable over the period.