Nonlinear Relationship between Public Debt and Environmental Debt with Regard to the Role of Institutional Quality

Document Type : Original Article

Author

Assistants Professor, Department of Economics, Payam Noor University, Tehran, Iran

Abstract

On the one hand, public debt can help reduce environmental debt by financing projects that promote environmental sustainability. On the other hand, the high level of public debt often limits investment in renewable energy and puts pressure on natural resources, thereby aggravating the environmental debt. Therefore, examining the nonlinear relationship between public debt and environmental debt is important. However, this nonlinear relationship may be affected by factors such as the quality of debt management. Accordingly, the main objective of this study is to investigate the role of institutional quality in the nonlinear relationship between public debt and environmental debt in developing countries during the period 1996-2022. For this purpose, panel cointegration analyses with cross-sectional dependence and the cross-sectionally augmented autoregressive distributed lag (CS-ARDL) have been used. The empirical results indicate that, as the public debt-to-GDP ratio increases, per capita environmental debt initially decreases, but after reaching a certain level, it increases. This result confirmed the U-shaped relationship hypothesis between the two debts in developing countries with a threshold level of 67.5 percent. Additionally, according to the results, an increase (decrease) in institutional quality raises (lowers) the threshold level of public debt and, as a result, increases (decreases) the effectiveness of public debt in reducing environmental debt. The robustness of the empirical results has also been confirmed using the PMG-ARDL method. Additionally, according to the results, an increase (decrease) in institutional quality raises (lowers) the threshold level of public debt and, as a result, increases (decreases) the effectiveness of public debt in reducing environmental debt. The robustness of the empirical results has also been confirmed using the PMG-ARDL method.

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References

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Public Sector Economics Studies
Volume 4, Issue 4 - Serial Number 14
January 2026
Pages 719-746

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History

  • Receive Date: 09 November 2025
  • Revise Date: 29 December 2025
  • Accept Date: 30 December 2025

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