Energy Economics 134 (2024) 107549

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Energy Economics
journal homepage: www.elsevier.com/locate/eneeco

The effects of conventional and unconventional monetary policies of the

US, EU, and China on global green investment
Saira Tufail a, Shahzad Alvi b, *, Viet-Ngu Hoang b, c, Clevo Wilson b
a
Fatima Jinnah Women University, Rawalpindi, Pakistan
b
Queensland University of Technology (QUT), Brisbane, Australia
c
International School, Vietnam National University, Hanoi, Viet Nam

A R T I C L E I N F O A B S T R A C T

Keywords: This study investigates how the monetary policies of the USA, EU, and China affect global green investment
Conventional monetary policies differently by using the dynamic autoregressive distributive lag (DARDL) model and kernel-based regularized
Unconventional monetary policies least squares (KRLS). DARDL's results show that US monetary policy is not conducive to global green investment
Green bonds investment
in the short and long term. The EU's conventional monetary policy negatively impacts global green investment,
Dynamic autoregressive distributive lag model
Kernel-based regularized least squares
but only in the short term. However, China's conventional monetary policy boosts global green investment in the
long term. The inference from the response simulations implies that the conventional monetary easing policy of
the US, EU, and China positively influences global green investment in the long and short run. However, the
magnitude of the response of the EU is greater than that of the US and China. Unconventional monetary policy
easing of the US negatively influences global green investments in the short run, whereas China and EU policies
affect it positively. However, in the long run, global green investment is unaffected by unconventional monetary
policy easing in the case of the US. In contrast, China's and the EU's unconventional monetary policies easing
have had a positive impact. In the case of financial development, a negative impact on global green investment is
more strongly evident for China than for the US and the EU. Overall, the empirical results of this study
recommend that a significant change in the monetary policies of large economies is required to promote global
green investment for ecological transition.

1. Introduction (Goodhart, 2011; Dikau and Volz, 2021). Many central banks have
mandates with multiple objectives, such as preserving price stability,
The advent of green investment signifies a pivotal shift in the focus of ensuring financial stability, promoting full employment, and fostering
central banks and financial institutions. It symbolises a broader effort output growth (Cukierman, 2009). In contrast, certain central banks
towards sustainability in the contemporary monetary landscape at place exclusive emphasis on attaining price stability (Levieuge et al.,
global and regional levels. These investment instruments have arisen to 2019). After the global financial crises during 2007–2008, price stability
finance environmentally conscious projects and as a strategic tool in the and financial stability are not distinct goals but interconnected mone­
broader realm of monetary policies. Since its start in 2007, investments tary policy objectives in many countries (Nier, 2009). Currently, the
in green bonds have experienced a remarkable increase, expanding from investment and financing of green energy, also called green investment,
a global market size of around $18 billion in 2008 to $500 billion in align with the goals of maintaining price and financial stability within
2021 (World Bank, 2021). This expansion highlights the growing the framework of monetary policy (Dikau and Volz, 2021).
incorporation of environmental factors into the financial industry and In fact, the literature articulates that insufficient investment in green
integration of monetary policy into the fight against climate change and, investment is unfavourable for long-term price stability. The substantial
more broadly, against the ecological crisis threatening our societies and initial expenses in the areas of production and infrastructure building of
economies (Couppey-Soubeyran, 2020). renewable energy render them especially susceptible to fluctuations in
Within the current global monetary system, significant variations interest rates (Sawin, 2012). Additionally, a monetary policy that pri­
exist in the roles given to central banks across countries and regions oritises the reduction of short-term inflation by limiting investments in

* Corresponding author.
E-mail address: [email protected] (S. Alvi).

https://doi.org/10.1016/j.eneco.2024.107549
Received 31 December 2023; Received in revised form 27 March 2024; Accepted 9 April 2024
Available online 17 April 2024
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S. Tufail et al. Energy Economics 134 (2024) 107549

climate mitigation may increase the susceptibility of the global economy decisions and green investment, global discussions on green finance
to future climate-related shocks, which could negatively impact price have largely overlooked the role of monetary policy. Similarly, while the
stability (Krogstrup and Oman, 2019). Moreover, the lack of green in­ significance of green financing and investment for both price and
vestment could make the domestic economy more vulnerable to signif­ financial stability is recognized, there remains a noticeable scarcity of
icant price fluctuations in sectors that depend on high‑carbon energy or scholarly research exploring the relationship between monetary policy
other goods impacted by environmental changes (Curtin et al., 2019). and green finance. In light of this context, this study aims to investigate
On the other hand, the effects of climate change and environmental how the monetary policies of the USA, the EU, and China affect global
deterioration, as well as related efforts to reduce their effects, can have green investment. These major economies currently dominate the global
substantial ramifications for the stability of financial systems (Sawyer, landscape in terms of industrial production, innovation, and trade,
2022; Sun et al., 2022). Specifically, companies involved in fossil fuel shaping the trajectory of the world economy through their monetary
industries may face significant reductions in the value of their assets as policy actions. Additionally, due to their substantial production and
climate policies make the reserves listed on their financial statements consumption scale, these economies are the largest contributors to
worthless. The subsequent decrease in valuations could have significant global pollution.
implications for the stability of financial markets, a situation that central The remainder of this paper has three sections. Section 2 provides
banks are duly acknowledging and dealing with. methodology and data. Section 3 describes the empirical strategy, and
The presence of low interest rates presents a favourable opportunity Section 4 describes the results and discussion. The last section concludes
to augment long-term investments in a sustainable economy (Desalegn the paper.
et al., 2022). Projects requiring immediate investments to minimise
expenses and capitalise on future advantages become more appealing as 2. Methodology and data
the interest rate decreases. Renewable energy projects serve as a prime
example of this. In the beginning, these projects require a significant This study employs a novel dynamic autoregressive distributive lag
initial investment, but their ongoing operational expenses are relatively model and kernel-based regularized least squares (KRLS) model for its
low. Power generation relying on fossil fuels necessitates substantial analysis.
initial investments as well as significant ongoing operational expenses.
As the interest rate increases, future costs are discounted to a greater 2.1. Model specification
extent, making fossil fuels appear more favourable in comparison to
renewable energy. Monetary policy has an impact on investment de­ The impact of monetary policy on green bonds is investigated
cisions by influencing interest rates, which are a crucial factor in this through a range of dimensions - including conventional and uncon­
calculation. Furthermore, the decision of the central bank to either ventional monetary policy by taking into account both interest rate and
prolong or restrict credit has a significant influence on green investment. quantitative easing. The general form of the model is given as follows.
Green bonds hold significance that goes beyond their financial value;
they symbolise a critical response to the pressing challenges presented GBt = f ( MPt , Xt ) (1)
by climate change. The increasing occurrence of extreme weather
where green bonds (GB) is the function of monetary policy (MP) rep­
events, energy crises, and environmental degradation has heightened
resents the variables and Xi other control variables. The MP variables are
attention towards sustainable development (Cepni et al., 2022; Bonato
given as follows:
et al., 2023). Green bonds offer a concrete solution to these challenges
⎡ ⎤
through providing a financial means to support environmentally sus­ Conventional MP
tainable initiatives. They have become increasingly important, espe­ Monetary policy (MP) = ⎣ Unconventional MP ⎦
cially due to the urgent need to reduce carbon emissions caused by their MP outcome
⎡ ⎤
high energy consumption and dependence on fossil fuels (Ren et al., Interest rate (IR)
2022; Ren et al., 2023; Zhang et al., 2023). Green investment also im­ = ⎣ Quantitative esing (QE) ⎦
proves the investment efficiency of renewable energy (Zhao et al., Financial development (FD).
2023). Many economies have made substantial progress in employing
where conventional MP is captured through interest rates while
green bonds to finance various environmentally friendly projects, thus
unconventional MP is implemented through quantitative easing. Mon­
showcasing the potential of green finance as a catalyst for achieving net
etary policy's long-term outcome is captured in the form of financial
zero emissions target.
development.
However, the landscape of green investment is not without its
⎡ ⎤
complexities. The volatility and the uncertainties surrounding these US − Interest rate (US − IR)
policies profoundly influence the green bond market (Kanamura, 2020). US monetary policy (USMP) = ⎣ US − Quantitative easing (US − QE) ⎦
The relationships between the green bond market and other financial US − Financial development (US − FD)
markets, including conventional bond and stock markets, renewable
energy, and commodities, are the subject of extensive research (Mert­ ⎡
C − Interest rate (C − IR)
⎤
zanis, 2023; Azhgaliyeva et al., 2022; Su et al., 2022; Wang et al., 2023). China monetary policy (USMP) = ⎣ C − Quantitative easing (C − QE) ⎦
Another body of work explores aspects such as pricing, issuer financing, C − Financial development (C − FD)
cross-market links, and hedging effectiveness. For example, green bonds
have been shown to exhibit significant bidirectional causal effects on ⎡ ⎤
EU − Interest rate (EU − IR)
energy markets (Braga et al., 2021; Shahbaz et al., 2021). Furthermore, EU monetary policy (USMP) = ⎣ EU − Quantitative easing (EU − QE) ⎦
the green bond market's connectedness to the carbon emission trading EU − Financial development (EU − FD)
market has been observed, with implications for both short-term and
long-term hedging strategies (Hammoudeh et al., 2020; Rannou et al., The vector of control variables Xt is depicted as follows:
2021; Pham and Do, 2022). However, the efficacy of these measures has ⎡ ⎤
been a subject of debate, highlighting the need for more practical so­ Energy taxes (ET)
⎢ Environment stringency (ES) ⎥
lutions at the intersection of environmental and economic policies such Control variables (X) = ⎢ ⎥
⎣ Climatic vulnerability (CV) ⎦
as transparency and availability of relevant environmental information
Global economic activity (GEA)
(Jankovic et al., 2022; Tang et al., 2023).
In spite of the evident connections between monetary policy

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S. Tufail et al. Energy Economics 134 (2024) 107549

where all the control variables are taken at global level. Table 1
From the general equations, we can examine the following models: Variable description and sources.
Model 1: Conventional monetary policy and green bonds Variable Description Details Level and Source
units
GBt = β0k + β1k IRtk + β2k ET t + β3k ESt + β4k CV t + β5k GEAt + vtk (2)
Green bonds Green bonds Banks World/ Clima
Model 2: Unconventional monetary policy and green bonds issued International billion USD tenet.org
globally organization
GBt = α0k + α1k QEtk + α2k ET t + α3k ESt + α4k CV t + α5k GEAt + μtk (3) Local and state
Government
Model 3: Monetary policy outcome and green bonds Nonfinancial
corporations
GBt = γ0k + γ1k FDtk + γ 2k ET t + γ3k ESt + γ 4k CV t + γ 5k GEAt + utk (4)
Other financial
corporations
where t ranges from 1985 to 2022 and k = US, China and EU and. Sovereign
The inclusion of variables in Eqs. (2)–(4) is based on strong theo­ State-owned
retical underpinnings. Incorporating climate vulnerability into the entities
sustainability
model aims to address the contemporary question of whether increased
linked green
climate vulnerability expedites the green initiatives. According to recent bonds
studies by Wen et al. (2023) and Lin et al. (2022), nations grappling with Conventional Interest rate US Federal Country Federal
greater climate vulnerability tend to exhibit limited investment bases monetary fund rate level Reserve
and capacities. Conversely, they face heightened and more urgent im­ policy The Central economic
Bank of the data
peratives to invest in green technologies and infrastructure and to
People's
expedite the replacement of capital and the adoption of new technolo­ Republic of
gies compared to their less vulnerable counterparts. Moreover, Islam China (PCB)
(2022) has pointed out that countries facing climate vulnerability may marginal
lending facility
attract increased allocations from global climate funds, enabling them to
European
intensify their green investment efforts. In summary, the question of Central Bank
whether climate vulnerability effectively stimulates increased green (ECB)
investment remains uncertain. Marginal
It has also been primarily recognized that phasing out fossil fuel Lending
Facility
subsidies and implementing taxes on non-renewable energy is pivotal to
Unconventional The growth Broad money Country Federal
enhance green finance. Energy taxes serve the dual purpose of creating monetary rate of money and level Reserve
fiscal space to finance green energy projects and smoothing the transition policy supply components economic
from nonrenewable to green solutions through the substitution effect. for the US, data
China, and EU
Stringent environmental policies are emerging as the cornerstones of
(19 countries)
a sustainable environment and present as effective solutions for Monetary Policy Financial Financial Country Global
reducing CO2 emissions. The implementation of stringent environ­ Outcome development Development level Financial
mental policies has consistently been a focal point in promoting a green Index Database
economy, including in the realm of green finance. A well-structured constituting
financial
environmental policy incentivizes industries to adopt eco-friendly
market and
technologies that mitigate carbon emissions (Dechezleprêtre and Sato, institution
2017). This connection is closely intertwined with the facilitation of index
green finance. Consequently, environmental policy stringency, envi­ Environment Environment World Level OECD.
ronmental tariffs, and environmental regulations possess the potential to stringency policy stat
stringency
drive shifts in production, consumption, and financial activities towards Index
products that are more environmentally friendly, in turn driving the Climate Climate Country Wen et al.
issuance of green bonds (Tolliver et al., 2020; Povitkina, 2018). Vulnerability vulnerability Level (2023)
index aggregated
for the
2.2. Data and description of variables World
Energy tax Country OECD.
Level stat
The empirical analyses of the study are performed using time series
aggregated
data ranging encompassing the period 1985 to 2022. The details of the for the
study's variables are provided in Table 1. World
global economic Index of real World level Federal
activity global Reserve
3. Estimation strategy economic economic
activity data
The relationship between the monetary policy of the selected econ­
omies and global investment in green bonds may vary at different time
horizons. Additionally, it's crucial to comprehend how different mone­ equilibrium relationships in terms of levels and differences. The DARDL
tary policy measures affect global green investment in the short, inter­ estimation method helps us identify the effects of counterfactual
mediate, and long run. To fulfill these requirements, the study has changes in a weak exogenous suppressor over time using stochastic
employed the DARDL model. simulation techniques, holding all other factors constant (Jordan and
The DARDL model offers a flexible computational technique that Philips, 2018). Dynamic simulation methods have gained popularity
allows users to generate a variety of DARDL models including error because results can be subject to time series models of coefficients
correction models (Philips, 2018; Adedoyin et al., 2023). The novel having ambiguous or hidden interpretations (Breunig and Busemeyer,
DARDL simulations model proposed by Jordan and Philips (2018) is 2012; Philips, 2018; Jordan and Philips, 2018). The DARDL represen­
appropriate for testing cointegration and long-run and short-run tation of the model in Eqs. (2)–(4) is given as follows:

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S. Tufail et al. Energy Economics 134 (2024) 107549

ΔGBt = δ0 + δ1k GV t− 1 + δ2k IRkt− 1 + δ3k ET t− 1 + δ4k ESt− 1 + δ5k CV t− 1 + δ6k GEAt− 1 + θ1k ΔIRkt + θ2k ΔET t + θ3k ΔESt + θ4k ΔCV t + θ5k ΔGEAt + τk ECT tk + εtk (5)

ΔGBt = ∂0 + ∂1k GV t− 1 + ∂2k QEkt− 1 + ∂3k ET t− 1 + ∂4k ESt− 1 + ∂5k CV t− 1 + ∂6k GEAt− 1 + ∅1k ΔQEkt + ∅2k ΔET t + ∅3k ΔESt + ∅4k ΔCV t + ∅5k ΔGEAt + ϑk ECT t + ∈tk
(6)

ΔGBt = φ0 + φ1k GV t− 1 + φ2k FDkt− 1 + φ3k ET t− 1 + φ4k ESt− 1 + φ5k CV t− 1 + φ6k GEAt− 1 + σ 1k ΔFDkt + σ 2k ΔET t + σ 3k ΔESt + σ 4k ΔCV t + σ5k ΔGEAt + ωk ECT tkj + etk
(7)

Eqs. (5)–(7) is the DARDL representation of Eqs. (2)–(4), respec­ through quantitative easing (QE). Financial development represents the
tively. δ′s, ∂′s, φ′s capture the long run relationship θ′s ∅′s and φ′s capture outcome of monetary policy in the financial sector. We started the
the short run relationship. τ, ϑ and ω capture the speed of adjustment analysis using descriptive statistics, which are reported in Table 2. The
towards equilibrium due to any shock. Estimation is followed by a unit root test is also applied to check the stationary, and it is found that
simulation analysis where MP indicators are given 2, 5, and 10 per­ the dependent variable is I (1), while independent variables have a
centage point positive shocks to examine their potential to predict green mixed order of stationary.
variables for 20 years.
There are three important issues that need to be addressed in the
4.1. Dynamic autoregressive distributive lag model and simulation
empirical analysis. The first issue is regarding the small sample size and
analysis
the validity of the unit root test. It is ascertained in the literature (see, for
instance, Pierse and Snell, 1995) that both ADF and Philips Perron (PP)
The results of the DARDL model depicting the relationship between
tests are asymptotically independent of nuisance parameters under both
green bond investment and different types of monetary policy of the US,
H0 and HA irrespective of sample size. Pierse and Snell (1995) show that
China, and EU show that in all the models with conventional monetary
even in finite samples, this result holds well for tests of cointegration,
policy, there is significant evidence of cointegration as the F-stat value is
which is pivotal to ARDL methodology. Considering this property, we
significantly greater than the upper bound value. The ECT is negative
have used these tests to examine the unit root properties of the data.
and statistically significant at the 5% level for all models depicting the
The second issue is related to the selection of the lag length, where
stability of the model. The ECT term shows that the speed of conver­
the use of higher lags leads to a reduced number of degrees of freedom.
gence is highest in the model with US monetary policy and lowest in the
The literature argues that the lag length in the case of ARDL is complex
EU policy. Interestingly, the interest rates of the US, EU, and China,
(Jordan and Philips, 2018), and that multiple lags may be selected for
which are the tool for conventional monetary policy, show a statistically
different variables. According to them, the DARDL model uses a simple
insignificant and negative relationship with global green bond invest­
procedure that selects same lag length for all variables considered. We
ment in both the long and short run except for the EU where conven­
used the AIC criterion to choose the lag length.
tional monetary policy becomes significant for global green bond
The third issue pertains to the estimation of the coefficient for which
investment in the short run (see Table 3). This is because higher interest
the remaining 25 degrees of freedom are sufficient to estimate the co­
rates could prompt and encourage investors to favor conventional assets
efficient accurately. The most concerning issue is an inference based on
over bonds, thus reducing demand and adversely affecting the pricing
the results having a lower degree of freedom. One possible downside is
and issuance of green bonds (Schoenmaker, 2021).
that results could be affected by lower degrees of freedom. We have
Table 4 contains the results of the DARDL model regarding the
countered this issue by providing the results of another compatible semi-
relationship between green bonds and the unconventional monetary
parametric technique, namely the kernel-based regularized least squares
policy of the US, EU, and China. For all model specifications, evidence of
(KRLS) model, which is independent of the degrees of freedom
significant cointegration is found. The ECT is negative and statistically
restrictions.
significant at the 1% level of significance. Unconventional monetary
policy in the form of quantitative easing raises global green investment
4. Results and discussion
significantly for China only in the long run. Quantitative easing by the
US and EU does not induce global green financial investment. China has
In this section, results ascertaining the impact of conventional and
the largest green bond market, which is attributed to initiatives - such as
unconventional monetary policy and monetary policy outcome of the
formulating green bond standards, dissemination of information about
US, EU, and China on global green bond investments are presented and
the environment, and inclusion of sustainability factors in the policies of
discussed in detail. Conventional monetary policy is captured through
the central bank – which were taken earlier than those taken by the US
interest rates whereas unconventional monetary policy is represented
and EU. Moreover, the Chinese government made use of the top-down
approach of the green taxonomy, where green investment was pro­
Table 2 moted by a capitalist economic system that is state-driven and coordi­
Descriptive statistics. nated. On the other hand, for the US and EU, the recently formulated US
Variable Obs Mean Std. dev. Min Max Federal Bank and European Central Bank green taxonomy policies,
GB 38 234.102 602.049 0.11 2603.676
respectively, which were inspired by China's success, uses the bottom-up
ET 38 1.377 0.108 1.07 1.56 approach. Although slow in encouraging green investments, the
US-IR 38 3.578 3.541 0.04 14.35 important financial institutions with a global influence are situated in
EU-IR 38 2.792 1.661 0.25 5.75 the US, which nevertheless encourage green financing (Larsen, 2021).
C-IR 38 4.881 2.593 2.7 10.44
The impact of financial developments in the US, EU, and Chinese
CV 38 0.395 0.013 0.381 0.417
ES 38 1.81 0.968 0.423 3.285 economies on world green bond investments is presented in Table 5.
GEA 38 0.731 52.114 − 89.334 144.553 There is strong evidence of cointegration and model stability for all the
EU-QE 38 6.123 3.398 − 1.06 12 model specifications. Financial development in the US discourages
China-QE 38 19.237 8.809 6.991 46.67 global green bond investment at the global level. A 1% increase in
US-QE 38 6.51 4.36 − 2.752 17.2
financial development leads to a long-term decline in global green bond

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S. Tufail et al. Energy Economics 134 (2024) 107549

Table 3
DARDL results for conventional monetary policy and green bond investment.
US China ECB

Variables Coefficients (S.E) Coefficients (S.E) Coefficients (S.E)

ECT − 0.32*** − 0.31*** − 0.28***

(0.09) (0.10) (0.10)
Long run results Short run results Long run results Short run results Long run results Short run results
IR-US − 0.05 − 0.052 – – – –
(0.05) (0.07)
IR-China – – − 0.015 0.004 – –
(0.09) (0.12)
IR-EU – – – – − 0.04 − 0.14***
(0.18) (0.03)
CV 4.13*** 5.81** 3.75*** 5.42** 5.28** 3.59***
(1.41) (2.19) (1.40) (2.54) (2.41) (1.40)
ET 4.79* − 2.09 5.21* − 2.30 − 1.82 5.02**
(2.67) (2.53) (2.67) (2.54) (2.52) (2.64)
ES 4.82*** 5.28** 4.53*** 3.94** 4.36** 4.29***
(1.42) (2.19) (1.42) (1.86) (1.99) (1.50)
GEA − 0.01*** − 0.0004 − 0.01*** − 0.01*** − 0.01*** − 0.001
(0.003) (0.003) (0.003) (0.003) (0.003) (0.002)
F-stat 5.95*** 5.41*** 6.37***
F-stat (Bound test) I(0) I (1) I(0) I (1) I(0) I (1)
3.42 4.84 2.8 4.2 2.8 4.2
Outcome Cointegration Cointegration Cointegration
R2 0.73 0.72 0.75
Adj R2 0.61 0.58 0.63

Source: Authors' tabulation. Results estimated using Stata 17.

p < 0.01*** indicates the significance of the variable at 1%, p < 0.05** indicates the significance of a variable at 5%, and p < 0.1* indicates the significance of a
variable at 10%.

Table 4
DARDL results for unconventional monetary policy and green bond investment.
Variables US China ECB

ECT − 0.29*** − 0.27*** − 0.32***

(0.10) (0.09) (0.0.09)
Long run results Short run results Long run results Short run results Long run results Short run results
QE-US 0.002 − 0.031 – – – –
(0.03) (0.03)
QE-China – – 0.06** 0.004 – –
(0.02) (0.12)
QE-EU – – – – 0.03 0.03
(0.03) (0.03)
CV 3.92*** 6.22** 3.31** 5.42** 3.93*** 5.63**
(1.41) (2.49) (1.52) (2.54) (1.39) (2.46)
ET 0.64** − 0.36 0.75** − 2.30 0.64** − 0.21**
(0.31) (0.29) (0.31) (2.54) (0.30) (0.30)
ES 4.68*** 4.19** 4.48*** 3.94** 4.82*** 4.19**
(1.42) (1.81) (1.42) (1.86) (1.43) (1.80)
GEA − 0.01*** − 0.002 − 0.01*** − 0.01*** − 0.01*** − 0.001
(0.003) (0.002) (0.003) (0.003) (0.003) (0.002)
F-stat 6.13*** 5.41*** 5.79***
F-stat (Bound test) I(0) I (1) I(0) I (1) I(0) I (1)
3.42 4.84 2.8 4.2 2.8 4.2
Outcome Cointegration Cointegration Cointegration
R2 0.74 0.72 0.73
Adj R2 0.62 0.58 0.63

Source: Authors' tabulation. Results estimated using Stata 17.

p < 0.01*** indicates the significance of the variable at 1%, p < 0.05** indicates the significance of a variable at 5%, and p < 0.1* indicates the significance of a
variable at 10%.

investment of 0.16%. In more financially developed markets such as the short and long run. The magnitude of the effect intensifies with EU
US, investors prefer to invest in less risky and traditional assets over financial development. In EU green taxonomy, the motivation to invest
newer, greener technologies and bonds, which are not obligatory. The in greener initiatives is compliance of the businesses to sustainability
reason for the fall in the investment in green bonds due to financial only, not the financial benefits. In China, on the other hand, its financial
development can also be due to increased liquidity in the market, which sector development can significantly induce world green financial in­
promotes the sale and purchase of conventional bonds. Another cause is vestment given the size of its global stock of green bonds (Larsen, 2021).
that more integrated financial markets are subject to regulations, which Moreover, an integrated financial market will help allow access to
can make green bond financing somewhat more difficult. capital for investment in environmentally friendly technologies and
A similar kind of relationship is also examined between financial projects. Such a development in China would prove to be highly bene­
development in the EU and world green bond investment both in the ficial to the promotion of green assets given the extent to which China

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S. Tufail et al. Energy Economics 134 (2024) 107549

Table 5
DARDL results for financial development and green bond investment.
Variables US China ECB

ECT − 0.75*** − 0.41** − 0.49***

(0.18) (0.16) (0.16)
Long run results Short run results Long run results Short run results Long run results Short run results
FD-US − 0.16** 0.06 – – – –
(0.08) (0.13)
FD-China – – 0.09** − 0.13** – –
(0.04) (0.05)
FD-EU – – – – − 0.49 * − 0.54**
(0.26) (0.24)
CV 17.14*** 10.07* 13.64** 12.12** 19.76** 11.60
(6.34) (5.82) (5.98) (5.77) (8.15) (7.7)
ET 0.10 − 0.12 0.17** − 0.16** 0.14* − 0.08
(0.09) (0.09) (0.07) (0.03) (0.07) (0.08)
ES 0.15*** 0.12** 4.48*** 0.05 0.15*** 0.11*
(0.05) (0.06) (1.42) (0.05) (0.05) (0.06)
GEA − 0.0002* 0.0001 0.0001 0.0002 − 0.0001*** 0.0001
(0.00001) (0.0001) (0.0001) (0.0007) (0.0001) (0.0001)
F-stat 7.24*** 8.14*** 7.24***
F-stat (Bound test) I(0) I (1) I(0) I (1) I(0) I (1)
3.42 4.84 2.8 4.2 2.8 4.2
Outcome Cointegration Cointegration Cointegration
R2 0.84 0.85 0.85
Adj R2 0.75 0.75 0.73

Source: Authors' tabulation. Results estimated using Stata 17.

p < 0.01*** indicates the significance of the variable at 1%, p < 0.05** indicates the significance of a variable at 5%, and p < 0.1* indicates the significance of a
variable at 10%.

provides financial regulatory support (Larsen, 2023). attractive to investors. Government support for green initiatives, such as
The effect of all other control variables is mostly consistent in all the subsidies and tax breaks, boost investor confidence in green bonds and
model specifications. Climatic vulnerability has a positive and signifi­ attract more capital to the market. Furthermore, stringent environ­
cant impact on green bond financing in all models, both in the short and mental policies positively influence investor sentiment, signaling a
long run. The adverse effects of climate change drive the demand for commitment to sustainability and environmental responsibility and
investment in green technologies and sustainable and resilient projects. increasing long-term investment in green bonds (Choi and Cho, 2021).
Thus, investors find there is a better opportunity to invest in green bonds Global economic activity has a negative impact on green bond in­
in the short run (Rossitto, 2021). Similarly, in the long run, climatic vestment, both in the long and short run, but the effect is significant only
vulnerabilities negatively affect corporate liquidity, bond prices, in­ in the long run. This can lead to increased risk aversion during economic
vestment decisions, financing costs and credit expansion, creating a downturns, negatively affecting green bond financing as investors shift
major risk for investment in traditional financial assets (Stroebel and towards traditional assets. China, a major player in global supply chains,
Wurgler, 2021). Therefore, a growing commitment of countries to a low- can have its economic activities greatly influenced by shifts in global
carbon economy and investment in renewable energy and sustainable trade dynamics. It may adversely affect industries and, thus, the finan­
infrastructure is positively influencing global investor attitudes towards cial performance of green projects.
green bonds, making them more attractive by aligning the investors' Following the results of DARDL, a simulation analysis is conducted to
long-term investment choices with climate goals (Dafermos et al., 2018). examine the impact of conventional and unconventional monetary
Energy taxes have a varied impact on green bond investment in policy and financial development of the US, China, and the EU on global
different model specifications. On average, a positive significant effect is green investment in the short and long run. The immediate impact
discerned in the long run, demonstrating that energy taxes can provides information relating to the short run, and the latter represents
encourage green bond financing in the long run by increasing the cost of the long run. A 2%, 5%, and 10% monetary easing, quantitative easing,
traditional energy sources and aiding businesses and individuals to and financial development are introduced in all three economies. The
adopt sustainable practices. This shift towards renewable energy and results are depicted in Fig. 1–3. The shock is initiated in the 10th period,
energy-efficient technologies can lead to increased demand for green so as to exclude the initial 10 periods from the simulation analysis, as
bonds (Hymel, 2006). Additionally, energy taxes can generate revenue indicated by Jordan and Philips (2018). Consequently, the simulation
for governments, which can support green initiatives and sustainable analysis is conducted over 20 periods. In the literature, simulation is
infrastructure development (Bashir et al., 2020). However, in the short often conducted for a period between 10 and 30 years for >30 years of
run, energy taxes discourage green bond investment by increasing en­ old data series by using the DARDL model (e.g., Pata and Isik, 2021;
ergy costs and straining household budgets and business operations. Abbasi et al., 2021). In this study, we chose the 20 years of simulation
This can reduce investment in energy-efficiency measures and renew­ considering the growth of green bonds globally since their inception in
able energy projects (Peterson, 2021) 1985. With this intuition in mind, it is reasonable to analyse the sub­
The environment stringency positively and significantly impacts sequent 20 periods to provide more insights into the future patterns of
green bond investment in both the long and short run in all model green bonds and its increasingly important role in many future decades.
specifications. With more stringent environmental policies adopted at The plot of the DARDL simulation in Fig. 1 indicates that a 2% easing
the global level such as carbon pricing and renewable energy mandates, of monetary policy of all three economies in the predicted interest rate
the demand for green bonds is observed by making traditional energy has a positive but negligible influence on global green investment in the
sources more expensive and promoting sustainable alternatives. This short and long run. A 5% easing in the expected interest rate increases
leads to higher issuance of green bonds and increased investment in the investment of green bonds by around 3% in the long run and by 3.5%
greener projects (Assamoi and Wang, 2023). Additionally, stringent for a 10% easing shock for US monetary policy. For China, a substantial
policies can reduce the risk of stranded assets, making green bonds more easing monetary policy of 5% and 10% does not promote global green

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S. Tufail et al. Energy Economics 134 (2024) 107549

Fig. 1. Response of green bond investment to monetary policy easing in the US, EU, and China. (For interpretation of the references to colour in this figure legend,
the reader is referred to the web version of this article.)
Source: DARDL post-estimation simulations - The black dots specify the predicted value and dark blue to light blue lines denote 75%, 90%, and 95% confidence
intervals respectively. The 2, 5, and 10% easing of monetary policy is displayed.

investment. For the 2%, 5%, and 10% shocks in predicted interest rates, growth shocks of 5% and 10% lead to a significant increase in green
the response of global green investment is better recorded in the case of bond investment, both in the short and long-run periods. However, the
the EU, followed by the US, then China. This is because the ECB intro­ effect of a 10% shock is greater than a 5% shock in predicted quanti­
duced the climate risk financial stress test to reduce uncertainty in long- tative easing. Comprehensive global green investment guidelines and
term green investment (Tashtamirov, 2023). With a 10% easing in in­ incentivizing green lending by the Chinese government encouraged the
terest rates, the response of the green bond market is more pronounced growth of green bonds by fulfilling the green financial capital needs
in all countries. The overall results for conventional monetary policy in (Tashtamirov, 2023).
all three economies show that green investment changes positively with In the case of the EU, a quantitative easing of 2% has a slightly
the decrease in interest rates in the long and short run. However, a positive influence on green bond investment, both in the long and short
greater reduction of interest rates leads to a more significant rise in run. With a 5% quantitative easing, green bond growth rises in the in­
green investment. termediate period and then remains increasing and positive in the long
Fig. 2 shows the response regarding world green bond investment for run. The effect of a 10% rise in money growth on green bonds is similar
the predicted quantitative easing in the US, China, and EU. In the case of to a 5% rise but more pronounced. The ECB has made them more
the US, with a 2% positive shock in quantitative easing, the response of attractive investment options by introducing a new framework for
the global green bond investment market is recorded as being negligible collateral eligibility and giving preferential treatment to green bonds.
in the long and short run. With a 5% shock in quantitative easing, the The ECB has also launched a pilot program for green quantitative easing,
predicted green bond rate decreases during the shock but then increases which includes purchasing a limited amount of green bonds directly
over time. In the long run, the value of global green bonds remains from market participants. This initiative raises investor awareness about
around the initial value. With the 10% positive shock in money supply the growing importance of sustainable investments, thus aiding in pro­
growth, global green investment decreases in the short run but then moting green bond financing (Wdowin, 2021). Moreover, in the long
increases over time and remains almost similar to the initial values. term, the expected outcome of these policies includes developing a
In the long run, quantitative easing encourages green bond financing robust green finance system, including the creation of green bond
by creating a low-interest-rate environment, as it increases the money indices and ESG rating criteria. This system is presumed to facilitate
supply and lowers interest rates, making borrowing cheaper. This can better pricing and risk assessment for green bonds, attracting more in­
benefit green projects and investment by reducing capital costs and vestors and issuers (ECB, 2024).
incentivizing issuers to issue green bonds. However, unconventional China's unconventional monetary policy has a visible impact on
monetary policy easing in the short run may discourage green bond global green investment in the long and short run compared to the EU
financing due to increased market volatility and risk aversion. Investors and US. The increase in money supply in the US results in a fall in global
may prioritize traditional, low-risk investments over green bonds during green investments in the short run but rises in the case of China and the
economic uncertainty (Duca et al., 2016; Bremus et al., 2021). EU. In the long run, green bonds are not significantly affected by the
In the case of China, the quantitative easing of 2% causes global shock in the case of the US, whereas quantitative easing in the case of
green bond investment to increase in the intermediate to run long, but China and the EU has a positive influence. In the short run, quantitative
the rise is more prominent in the intermediate period. Positive money easing reduces borrowing costs by injecting liquidity into the financial

7
S. Tufail et al. Energy Economics 134 (2024) 107549

Fig. 2. Response of green bond investment to quantitative easing in the US, EU, and China. (For interpretation of the references to colour in this figure legend, the
reader is referred to the web version of this article.)
Source: DARDL post-estimation simulations. The black dots specify the predicted value, and dark blue to light blue lines denote 75%, 90%, and 95% confidence
intervals, respectively. The 2, 5, and 10% quantitative easing are displayed.

system, making it more affordable for companies and governments to shocks, the effect is decreasing but positive. So, a shift in financial
issue green bonds, also increasing investors' interest. Meanwhile, in the development in China has an overall negative impact on predicted
long run, quantitative easing stimulates economic growth, leading to global green investment in the long and short run. Financial develop­
increased demand for green products and services as production needs ment positive shocks have a more significant but negative impact on
to meet sustainability criteria. So, green investment increases (Fang global green investment in the case of China than in the US and EU. This
et al., 2023; Macaire and Naef, 2023). is because the market for green bonds is less developed. Also, a level of
Fig. 3 plots the DARDL simulations for global green investment and certainty in financial profits arising from the global green investment is
financial development of the US, EU, and China. In the case of the US, a necessary, which can only happen through the recognition of its
positive 2% financial development shock causes global green investment importance and acceptance of green bonds globally. The results for the
to rise intermediately but then to decrease continuously in the long run. remaining variables are provided in Supplementary 1.
So, financial development positively impacts global green bonds in the
short run but a negative impact in the long run. The response patterns of
global green investment to 5% and 10% shocks are almost similar to a 4.2. Kernel-based regularized least squares results
2% shock in financial development.
In the case of the EU, a 2% positive shock of financial development The results of KRLS are presented in Fig. 4–6. Fig. 4 presents the
causes global green investment to reduce, first on impact but to rise in pointwise marginal effects of the interest rates on global green invest­
the next year and then start to decrease although remaining positive. ment for the US, China, and the EU using KRLS. The first graph implies
The response pattern of global green bond investment remains similar that in the US, higher levels of interest rates reduce global green bond
with all the financial development shocks, whether 2%, 5% or 10%. The investment at lower levels from a threshold where increasing marginal
only difference is that in the long run, the values of the predicted change returns occur. In the long term, the marginal return increases with
in green bond volume become negative with positive shocks of 5% and higher values of green bonds. Consequently, interest rates in the US have
10% relating to financial development. Green bond investment in the increasing marginal returns with respect to green bond financing. This
long run and short run is negatively influenced by financial development implies that higher interest rates are associated with increased global
but becomes positive when the intermediate period is reached. green bond financing. In the US, higher interest rates on green bonds
In case of China, the shocks of positive 2, 5 and 10% in financial provide an opportunity for higher yields. Though green invesment is
development causes the value of global green bonds to fall at t = 10, promoted by the financial institutions through green bonds, the US
after which their values rise for one year and then start decreasing. With government is more focused on long-term carbon emissions reduction.
a positive 10% shock in financial development the effect on green bond For that task, legislation has been used, particularly the Inflation
investment becomes negative, but otherwise with 2 and 5% positive Reduction Act of 2022 (Inflation Reduction Act of 2022, 2023) that has
boosted the creation of start-ups in environment friendly projects.

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S. Tufail et al. Energy Economics 134 (2024) 107549

Fig. 3. Response of green bond investment to financial development of the US, EU and China, Source: DARDL post-estimation simulations-The black dots specify the
predicted value and dark blue to light blue lines denote 75%, 90%, and 95% confidence intervals respectively. The 2, 5 and 10% increases in financial development
are displayed. (For interpretation of the references to colour in this figure legend, the reader is referred to the web version of this article.)

Fig. 4. Pointwise marginal effects of conventional monetary policy on green bond investment. (For interpretation of the references to colour in this figure legend, the
reader is referred to the web version of this article.)

The second graph indicates that, in the case of China, lower interest reduces the upfront cost of borrowing for sustainable investments.
rates increase global green bond investment near the threshold level, but The third graph represents the case of the EU, where higher levels of
in the long run, the marginal effects of an interest rate decrease green interest rates reduce the value of global green bonds to a threshold level
bond financing up to a certain point. Subsequently, the marginal effect where a rising marginal effect comes into play. Afterward, the marginal
of interest rates rises. However, at higher levels of green bond invest­ effects of interest rates start decreasing with increasing values of green
ment, the marginal returns of interest rates rise. A lower interest rate bonds. Thus, interest rates in the EU have decreased marginal returns

9
S. Tufail et al. Energy Economics 134 (2024) 107549

Fig. 5. Pointwise marginal effects of unconventional monetary policy on green bond investment. (For interpretation of the references to colour in this figure legend,
the reader is referred to the web version of this article.)

Fig. 6. Pointwise marginal effects of financial development on green bond investment. (For interpretation of the references to colour in this figure legend, the reader
is referred to the web version of this article.)

with respect to global green bond investment. This indicates that higher financial development of the US, China, and EU on global green bond
interest rates may encourage global green bond investment up to a investment using KRLS analysis. The first graph indicates that in the US,
certain point, after which lower interest rates become more attractive the marginal returns of financial development at higher levels reduce
for investors. the global green bond at lower levels, up to a threshold level. After that,
Fig. 5 plots the pointwise marginal effects of quantitative easing in the marginal effect of the financial development increases at the inter­
the US, China, and the EU on world green bond investment. The first mediate levels of green bonds. In the long run, the marginal effect of
graph indicates that, in the case of the US, at higher levels of money financial development starts decreasing at very high green bond values.
supply, the effect on global green bond investment reduces at lower The second graph indicates that in the case of China, at higher levels
levels up to a threshold level, after which, at lower values of the money of financial development, the marginal returns of financial development
supply, the effect on green bond investment also keeps decreasing even decrease at lower levels of global green bond investment up to a
at higher values of green bonds. So, in the US, the marginal returns of the threshold point. After that, diminishing marginal returns continue to
money supply have a diminishing effect on green bonds. The second decline and remain unchanged at some intermediate levels of green
graph represents the case of China, where at lower levels of money bond investment. At higher levels of green bond investment, the mar­
supply up to the threshold level, the marginal effect is increasing at ginal effect of financial development starts decreasing again. So, the
lower levels of global green bond values. The diminishing marginal ef­ marginal effect of financial development has a declining effect on global
fect of the money supply continues after the threshold at higher levels of green bond investment. The third graph illustrates that in the case of the
green bond values is reached. In the long run, the marginal effect of the EU, at higher levels of financial development above a threshold point,
money supply rises slightly. The third graph demonstrates that, in the the marginal effect on global green bonds decreases at lower levels. The
case of the EU, from the threshold values, the marginal returns of the marginal return of financial development continues to diminish even at
money supply are increasing at the lower values of green bonds. The the higher levels of green bond investment. However, in the long run,
diminishing marginal returns of money supply becomes evident after the the marginal returns start to rise slightly. Thus, financial development in
threshold level is reached at the intermediate levels of green bond the EU has a diminishing marginal effect on global green bonds in­
values. But in the long run, the marginal effects of money supply start vestment. The results for the remaining variables are provided in Sup­
rising again. plementary 1.
Fig. 6 represents the plots of the pointwise marginal effect of the

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S. Tufail et al. Energy Economics 134 (2024) 107549

4.3. Discussion 5. Conclusion

The DARDL models' results indicate that the EU's conventional This study provides a comprehensive analysis of the impact of
monetary policy easing has a negative and significant impact on global differing monetary policies in the US, EU, and China on global invest­
green investment, but only in the short term. China's unconventional ment in green bonds. This analysis is conducted using the DARDL model
monetary policy has a positive and significant impact on green bond and KRLS, revealing varied effects of monetary policies.
investment in the long term. The inference from the response of the The empirical results show that US monetary policy generally does
DARDL simulations implies that conventional monetary policy easing not promote global green investment. While conventional monetary
positively influences green bond investment in the case of US, EU, and policy easing in the US has a positive influence on global green invest­
China, in both the long and short run. The response by the EU is more ment in both the short and long term, unconventional monetary policy
marked than that of the US and China. Unconventional monetary policy easing, specifically quantitative easing, negatively affects global green
easing in China causes a profound difference in the financing of the investment in the short term and does not have a significant impact in
green bonds in the long and short run compared to the EU and US. The the long term. While the EU's conventional monetary policy has a
US responded negatively in the short run, whereas green bond invest­ negative impact on global green investment in the short term, both
ment in China and the EU responded positively. However, in the long easing conventional and unconventional monetary policies positively
run, global green bond investment is unaffected by quantitative easing affect global green investment in both the short and long runs. Notably,
in the US, whereas the response was positive in the case of China and EU. EU policies' response is stronger than the US and China, indicating a
In the case of improving financial development, the negative response of more effective approach towards promoting global green investment.
green bond investment is more evident for China than for the US and EU. China's monetary policy shows a distinct pattern, with conventional
The results infer that the EU's conventional monetary policy is more monetary policy boosting global green investment in the long term.
effective in promoting global green bond investments than those policies Furthermore, China's unconventional monetary policy easing positively
in the US and China. However, the formulation of sustainable finance influences global green investment in the short and long run.
taxonomy, green bond standards, mandatory sustainability disclosures The study highlights the role of financial development. Financial
for asset managers, and climate stress testing policies have been taken development impacts these relationships differently, with a more
after analyzing their consequences in China. The ECB and the US Federal negative response observed in China compared to the US and EU.
Reserve are independent of their financial regulatory authorities, so the In conclusion, the study underscores the need for a significant change
incorporation of green finance alongside traditional forms of finance and in the monetary policies of major economies to promote global green
the development of a green taxonomy needed time, adjustment, and investment better. The study's limitation lies in the sample size used. A
consolidation. The ECB has successfully incorporated climate-related longer duration is anticipated to enhance the validity of the inferences
factors into its monetary objectives without affecting its primary price made.
stability objective. However, the US and China did not incorporate
sustainability goals into their monetary policy objectives to the same Funding statement
extent as the ECB. One possible reason is that while the US central bank
operates under dual mandates of price stability and full employment, it Funding has not been acquired for this research.
makes use of the Inflation Reduction Act of 2022 to provide grants,
loans, and tax provisions to green the economy, while China pioneered Disclosure statement
green financing using a top-down approach focusing on fiscal and reg­
ulatory measures for achieving green transition, rather than integrating The authors report there are no competing interests to declare.
the sustainability goals within monetary policy. Therefore, monetary
policy is greener in the EU than in the US and China. Ethical consideration
On the other hand, unconventional monetary policy is more effective
in China than in the US and EU because of the distinctive nature of No animal and human experiments and primary data are involved in
China's unconventional green monetary policy. The quantitative easing this research.
in China aims to provide a specific financial framework for sustainable
projects by explicitly allocating funds to green initiatives (Tashtamirov, AI-Statement
2023). Moreover, the Chinese government supports investors by align­
ing their broader goals with global green financing. In contrast, although No AI tool is used.
the US and EU have undertaken a number of green financing efforts by
introducing new frameworks, there has not been an explicit focus on CRediT authorship contribution statement
direct investment funds into green projects, which might lessen the ef­
fect on green bond investment. That's why the effect of unconventional Saira Tufail: Investigation, Formal analysis, Conceptualization,
monetary policy is greener in China than for the US and EU. Methodology, Software, Writing – original draft. Shahzad Alvi:
Financial development has a significant negative impact on global Conceptualization, Data curation, Formal analysis, Investigation,
green bonds in the short term, particularly in the case of China and the Methodology, Resources, Software, Writing – original draft, Writing –
EU, and in the long term, in the case of the US and EU. The US's review & editing. Viet-Ngu Hoang: Formal analysis, Investigation, Su­
developed financial markets may divert investor financing from green pervision, Validation, Writing – original draft. Clevo Wilson: Supervi­
bonds to corporate assets and limit green project investments. Moreover, sion, Validation, Writing – original draft, Writing – review & editing,
the US financial system's robust and transparent regulatory and Formal analysis.
reporting standards significantly hinder global green bond market
growth (Khan et al., 2019). In contrast, the EU and China show a Data availability
stronger commitment to sustainable finance, with initiatives like the
European Green Deal and building a comprehensive regulatory frame­ The data and additional results files are attached as supplementary
work in their financial systems that encourages green investment. information.
(Fatica et al., 2021). Thus, the highly regulated and legally infused US
financial system may not promote green initiatives, focusing instead on
domestic commercial incentives.

11
S. Tufail et al. Energy Economics 134 (2024) 107549

Appendix A. Supplementary data Larsen, L.M., 2021, July 15. Intersecting interests and coincidental compatibility: how
China, the EU, and the United States can coordinate their push for globalizing green
finance. Georgetown J. Int. Aff. Retrieved From https://gjia.georgetown.edu/2021/
Supplementary data to this article can be found online at https://doi. 07/15/intersecting-interests-and-coincidental-compatibility-how-china-the-eu-
org/10.1016/j.eneco.2024.107549. and-the-united-states-can-coordinate-their-push-for-globalizing-green-finance/.
Larsen, M.L., 2023. Bottom-up market-facilitation and top-down market-steering:
comparing and conceptualizing green finance approaches in the EU and China. Asia.
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