Does increasing environmental policy stringency enhance renewable energy consumption in OECD countries?

Despite extensive research to explore the channels through which environmental policy stringency can affect economy, to our best knowledge, current literature has not yet studied its impact on financial development in the long term. To fill this void, the current study empirically examines the effect of environmental policy stringency index on financial development index and its components, which are financial institutions development index and financial markets development index, in 27 OECD countries during the period 1990–2015. We find a positive association between environmental policy stringency index and financial development. The results also revealed that the past values of environmental policy stringency index can help to predict financial development index and financial institutions development index. These results imply that financial development is a new channel through which increasing environmental policy stringency could promote economic growth. Moreover, these findings show that environmental policy stringency forms a new positive determinant of financial institutions development in OECD countries.