Causal interactions between CO2 emissions, FDI, and economic growth: Evidence from dynamic simultaneous-equation models

- We examine the causal links between carbon emissions, FDI, and economic growth.
- Dynamic simultaneous-equation panel data models are used to address this issue.
- We find evidence of bidirectional causality between CO2 emissions and FDI inflows.
- Similar results are obtained for economic growth and FDI inflows, except one panel.
- CO2 emissions significantly affect economic growth for most panels of countries.

In this article, we investigate the causality links between CO2 emissions, foreign direct investment, and economic growth using dynamic simultaneous-equation panel data models for a global panel of 54 countries over the period 1990-2011. We also implement these empirical models for 3 regional sub-panels: Europe and Central Asia, Latin America and the Caribbean, and the Middle East, North Africa, and sub-Saharan Africa. Our results provide evidence of bidirectional causality between FDI inflows and economic growth for all the panels and between FDI and CO2 for all the panels, except Europe and North Asia. They also indicate the existence of unidirectional causality running from CO2 emissions to economic growth, with the exception of the Middle East, North Africa, and sub-Sahara panel, for which bidirectional causality between these variables cannot be rejected. These empirical insights are of particular interest to policymakers as they help build sound economic policies to sustain economic development.