Inflation and CO₂ Emissions: Asymmetric Moderating Effects of Financial Development in Fiji

This study explores the asymmetric moderating effect of inflation and financial development on carbon (CO₂) emissions using annual data from Fiji over the period from 1970 to 2023. This study is motivated by the dearth of evidence on the ecological implications of macroeconomic variables in climate-vulnerable small island developing states. We find that an increase in inflation more strongly reduces CO₂ emissions compared to by how much an equivalently sized decrease in inflation increases CO₂ emissions. We further find that positive shocks to financial development accentuate the negative effect of inflation on CO₂ emissions. Negative shocks, by contrast, attenuate the negative effect of inflation on CO₂ emissions. This pattern of asymmetries implies the presence of credit-constrained consumers who may be highly sensitive to cost-of-living pressures. The results further imply the role of demand suppression in mitigating CO₂ emissions. The policy implication is that macroeconomic indicators such as inflation tend to have ecological implications, which must be recognized by policymakers in determining stabilization policies.