Investigating the impact of monetary policy on environmental degradation in South Africa using nonlinear and time–frequency methods

We examine the impact of monetary policy on greenhouse gas (GHG) emissions in South Africa between 1991 and 2023 using the Nonlinear Autoregressive Distributed Lag (NARDL) model, the Quantile Autoregressive Distributed Lag (QARDL) model, and wavelet coherence analysis. The study addresses an important gap in the literature by providing country-specific evidence on how interest rate policy affects environmental outcomes in a low-inflation, low-interest-rate regime, an issue that has been largely overlooked in existing panel-based studies that assume linear and symmetric effects. We find that interest rates are positively associated with GHG emissions, indicating that lower interest rate environments are conducive to lower emissions outcomes. In particular, the NARDL results show that expansionary monetary policy reduces the cost of capital for renewable and cleaner investment projects, thereby supporting emissions mitigation, whereas contractionary monetary policies discourage such investments and exacerbate environmental degradation. The QARDL further shows that this relationship is more pronounced at higher levels of environmental degradation, suggesting that emissions become increasingly sensitive to monetary policy when the economy operates in a high-emissions regime. Lastly, time–frequency analysis reveals that the positive interest rate–emissions relationship has strengthened over time, with long-term co-movements becoming dominant in the post-2010 period. From a policy perspective, the results imply that the South African Reserve Bank’s low-interest-rate environment can naturally complement fiscal and energy policies aimed at reducing emissions, while prolonged monetary tightening may generate unintended trade-offs with climate mitigation objectives.