Does financial development enhance the environmental benefits of technological progress? An empirical investigation

Abstract A country’s financial development and technological advancement are key drivers of economic progress, which in turn impact environmental conditions. Although prior research has extensively investigated the individual roles of financial development and technological advancement in shaping environmental outcomes, their joint implications for environmental quality have received comparatively limited scholarly attention. This study seeks to bridge this gap by empirically analysing the moderating role of financial development in the relationship between technological advancement and environmental outcomes, considering both overall technological advancement and environmentally oriented technological progress. The econometric strategy employed in this study is the autoregressive distributed lag method, using data from 1980 to 2021 for Australia. The findings indicate that although financial development exacerbates environmental degradation, both overall technological advancement and environmentally related technological progress exert a favourable influence on environmental quality. The combined effect reveals that financial development moderates overall technological advancement in the short run, thereby enhancing environmental quality, although its moderating role becomes negligible in the long run. However, financial development moderates the relationship between environmentally oriented technological advancement and environmental quality in both the short run and long run, yielding consistently positive environmental outcomes. Additionally, the adverse environmental consequences of economic growth and energy consumption warrant careful consideration, as both contribute to environmental degradation. These findings offer valuable implications for policymakers, underscoring the need to align financial development with technological progress to achieve environmental sustainability objectives while also providing a potential policy model for other advanced economies.