Money supply and carbon procyclicality under the financial Kuznets curve

Purpose The persistent procyclicality of CO2 emissions poses a significant challenge to achieving sustainable development goals, as it undermines efforts to decouple economic progress from environmental deterioration. Given the central role of monetary policy in shaping economic cycles, we investigate how money supply affects CO2 procyclicality within the framework of the financial Kuznets curve (FKC). Design/methodology/approach Utilizing annual data from China spanning 1977 to 2022, we employ a comprehensive methodological approach including three cointegration tests, ARDL technique and Breitung–Candelon causality tests. The results indicate long-run cointegration among the variables under study. Findings ARDL estimations reveal a negative effect of money supply on CO2 procyclicality in the short run, transitioning to a positive effect in the long run. Financial development exhibits a U-shaped relationship with CO2 procyclicality in the short run, evolving into an inverted U-shaped relationship in the long run, thus confirming the presence of the FKC. Moreover, the Breitung–Candelon causality test demonstrates unidirectional causality from financial development to CO2 procyclicality in the long run. The robustness checks reveal that economic policy uncertainty serves as a transmission mechanism through which money supply affects carbon procyclicality. Our results emphasize the necessity for implementing adaptive monetary policies and green finance mechanisms to effectively decouple economic growth from environmental degradation. Originality/value First study to examine the impact of money supply on CO2 procyclicality within the FKC framework in China. In addition to that, applied different suite of cointegration tests and explores causal relationships among variables through the Breitung and Candelon (2006).