Evaluating the influence of green growth, institutional quality and financial inclusion on financial stability: evidence by sustainable finance theory

Abstract

Financial stability is essential for economic growth because it fosters confidence and trust and promotes investment in green development. However, it is a dilemma for the world economies to create an equilibrium between financial stability and environmental sustainability. In the extent of these challenges, the present study aims at grabbing the link of financial inclusion to attain financial stability. Further, the present study investigates the association of institutional quality, renewable energy, green growth, environmental sustainability, and financial inclusion with financial stability. Two basic econometric models are applied that focused on the basic and interaction term outcomes. In addition, principal component analysis (PCA) is analyzed to design an index for five proxies of financial inclusion. Additionally, the research inspected the interaction term of institutional quality and financial inclusion (FIN*INSQ) and determined the multiplied impact on financial stability in a separate model. This research employed the linear autoregressive distributed lag approach from 1990 to 2020 for long- and short-term dynamics. Theoretically, the research supports the sustainable finance and financial development theory. Hence, results showed that financial inclusion and institutional quality are positively associated with financial stability, while green growth, environmental sustainability, and renewable energy mechanisms are achieved through financial stability. Following our findings, the government should establish consistency between financial development and economic policies to maintain financial instability and ensure financial soundness. Furthermore, countries require viable financial institutions prioritizing green growth and institutional quality to achieve financial stability and long-term development.

Keywords: Environmental sustainability; Financial inclusion; Financial stability; Institutional quality; Renewable energy.