Financial Systems and Green Growth in Developing Economies: The Catalytic Role of Financial Stability for Sustainable Development

Abstract

This study investigates how financial institutions and financial markets contribute to green growth in developing countries, with a particular emphasis on the moderating role of financial stability. Unlike prior research that relies on single sustainability indicators, we adopt a multidimensional framework based on adjusted net savings, renewable energy consumption, and CO 2 emissions per unit of GDP. Applying a two‐step system GMM estimator to a panel of 34 developing countries from 1991 to 2022, the results show that the positive environmental effects of financial institutions and financial markets are significantly reinforced by macro‐financial stability. The interaction terms are consistently associated with higher green growth and renewable energy consumption and lower emissions intensity, indicating that greater financial stability may strengthen the environmental benefits associated with financial development. Additionally, the study finds that trade openness and population growth exert mixed or adverse environmental effects, particularly in financially unstable economies. Overall, the study reframes financial stability as a prerequisite for channeling financial resources toward environmentally sustainable development in developing economies.