Inflation and CO2 Emissions: Asymmetric Moderating Effects of Financial Development in Fiji

This study explores the asymmetric moderating effect of inflation and financial development on carbon (CO2) emissions using annual data from Fiji over the period from 1970 to 2023. This study is motivated by the dearth of evidence on the ecological implications of macroeconomic variables in climate-vulnerable small island developing states. We find that an increase in inflation more strongly reduces CO2 emissions compared to by how much an equivalently sized decrease in inflation increases CO2 emissions. We further find that positive shocks to financial development accentuate the negative effect of inflation on CO2 emissions. Negative shocks, by contrast, attenuate the negative effect of inflation on CO2 emissions. This pattern of asymmetries implies the presence of credit-constrained consumers who may be highly sensitive to cost-of-living pressures. The results further imply the role of demand suppression in mitigating CO2 emissions. The policy implication is that macroeconomic indicators such as inflation tend to have ecological implications, which must be recognized by policymakers in determining stabilization policies.