Assessing the Role of Macroeconomic Policy Tools in Addressing Environmental Degradation in Developing Countries

ABSTRACT This study investigates the counter cyclical role of fiscal and monetary policies in promoting environmental sustainability across 15 developing countries over 2002–2020. Specifically, the study focuses on the impact of government expenditures (GE) and real interest rates (IR) on both ecological footprint (EF) and carbon emissions (CO 2 ). Dynamic Seemingly Unrelated Regression method is used for estimating the coefficients. The findings reveal that expansionary fiscal policy (increase in GE) and contractionary monetary policy (increase in IR) contribute to preserving environmental quality, as measured by EF. Interestingly, when it comes to CO 2 , these macroeconomic policies appear to have a different effect, potentially impacting environmental quality negatively. These findings suggest that the effectiveness of these policies in achieving environmental sustainability shall be measured in terms of EF instead of CO 2 . In addition, empirical results highlight the significance of other variables, such as renewable energy use, GDP per capita, globalisation, and population, influencing the EF. Given the findings that expansionary fiscal policy (increased GE) and contractionary monetary policy (increased IR) both led to an increase in CO 2 while decreasing the EF, it is recommended that developing countries pursue these policies. The decrease in EF is a more comprehensive measure of environmental sustainability, encompassing broader aspects of human demand on nature and overall environmental impact.