The Impact of Monetary Policy on Environmental Pollution in A Transition Country: The Case of Vietnam

Abstract

The paper aims to determine the impact of monetary policy on environmental pollution in a transition country, with a focus on the case of Vietnam. The bounds testing approach is used to investigate the existence of a long-run cointegrating relationship between monetary policy and environmental pollution in Vietnam during the period from 1992 to 2020. Accordingly, the Autoregressive Distributed Lag (ARDL) model is employed to test the short-run and long-run effects of monetary policy on environmental pollution in Vietnam. The findings indicate that monetary policies in developing countries such as Vietnam have not had a direct impact on environmental pollution in either the short-term or long-term. However, there is a one-way causal effect of money supply expansion on increasing per capita electricity consumption, as well as a causal effect of per capita electricity consumption on environmental pollution. Based on these findings, some recommendations are proposed to promote green credit growth and a green banking in Vietnam.