Do economic complexity and macroeconomic stability asymmetrically affect carbon emissions in OECD? Evidence from nonlinear panel ARDL approach

Abstract

This study examines the asymmetric effect of economic complexity and macroeconomic stability on carbon emissions for OECD countries over the period between 1995 and 2020. We construct a nonlinear panel ARDL-PMG model to assess the short- and long-run impact of the positive and negative shifts of economic complexity and macroeconomic stability on carbon emissions. The asymmetric findings prove that macroeconomic stability and instability positively impact carbon emissions in the long run. Moreover, asymmetric economic complexity shocks increase pollution in the long run. The impact of short-run shocks on carbon emissions returns to long-run equilibrium in 2.75 years (33 months) with an annual correction of 36.4%. One of the most striking findings of this study is that the sophisticated, complex production structure may pollute the environment less than traditional production. However, it still increases environmental degradation in absolute terms. Therefore, economic complexity only slows the rate of increase in environmental pollution. Capital stock and institutional quality have a weaker effect on emissions, while openness does not.