Does financial development mitigate the effects of climate variability on rice cultivation? Empirical evidence from agrarian economy

Abstract

This study is the first attempt to examine the effects of changing climate and financial development on rice cultivation in the context of agrarian economy like Thailand from 1969 to 2016. The current study also uses other important variables, such as cultivated area, organic fertilizers usage, and rural labor to determine the long-term connection amid variables. In this study, we applied several econometric techniques, for instance the autoregressive distributive lag-error correction model (ARDL-ECM), vector error correction model (VECM), impulse response functions (IMFs), and variance decomposition (VARD) method to estimate the most reliable and robust outcomes. The empirical results showed that in the long- and short-run, there is a reduction in rice cultivation as temperature increase. The carbon dioxide (CO₂) positively affects rice cultivation in the long-run, while this association is negative in the short-run. The findings further revealed that in the long- and short-run, domestic credit provided by the financial sector significantly positive improved rice cultivation, while domestic credit to private sector by banks negatively affects rice cultivation. The important input factors, including cultivated area, organic fertilizers usage, and rural labor significantly positive contributed toward rice cultivation in the long- and short-run. The calculated long-run causal connection of all the studied variables with rice cultivation is validated. The estimated short-run causal relationship is unidirectional among temperature, CO₂ emissions, financial development, rural labor, and rice cultivation. In addition, our outcomes are robust and also verified by IMFs and VARD method. The study offers some important policy suggestions to increase rice production with the help of sound and well-developed financial systems and climate controls.

Keywords: ARDL; Climate change,; Financial development; Rice production; VECM framework.