LAUSR

This paper examines the complementarity/substitutability of international trade and financial development in the mitigation of carbon emissions for a panel sample of 62 middle-income countries from 1991 to 2010. Applying the bias-corrected LSDV estimator, the paper yields interesting results. For the full sample, international trade and financial development play an interactive and complementary role in reducing CO2 intensity of energy use. That is, the environmental benefit of international trade is materialized only if a country has a well-developed financial market. Likewise, financial development is beneficial to the environment only in a highly open economy. Having stated these, the analysis also uncovers evidence that these results may be different across levels of income or across regions. The results bear important policy implications for the abatement of the environmental problem in the middle-income countries.