Public debt and environment degradation in OIC countries: the moderating role of institutional quality

Abstract

Although the effect of public debt on environmental quality has been envisaged in prior empirical studies, the outcomes are inconclusive. Moreover, institutional quality can directly or indirectly influence public debt and environmental quality. However, empirical investigations probing the moderating role of institutional performance in public debt and environmental degradation relationship are missing. This research pursues to bridge this gap by exploring whether the institutional quality is a factor that moderates the debt-environment relationship of OIC economies in the period 1996 to 2018. Short-run findings disclose that public debt statistically significantly degrades the environment quality in the panels of low and overall OIC-income countries, but it mends the environmental performance in the high-income panel of OIC countries. Institutional performance is negatively linked with all environmental damaging measures across the three-income stratum of OIC countries. Both the short-run and long-run results of the interactive term between public debt and institutional quality reveal that it turns the unfavorable influence of public debt on environmental damaging measures. The outcomes of the study validated an inverted U-shape EKC when CO₂, CH₄, and ecological footprint are employed in all three-income panels of OIC countries. However, for N₂O emission, a U-shaped EKC is seen in the panels of low-income and overall OIC nations. To address environmental issues, our results suggest that OIC countries should improve the institutional quality and control the public debt at a certain level, also ensure sustainable use of biocapacity and forests.

Keywords: EKC; Institutional quality; OIC countries; Public debt; Renewable energy consumption.