Do green bonds foster economic growth conditional on financial development?

Abstract

This study examines the relationship between green bond issuance, the financial development index, and economic growth in selected Asian economies over the period 2012–2022. While green bonds have emerged as a key instrument for financing sustainable development, their contribution to macroeconomic performance remains unclear, particularly across countries with varying levels of financial development. To address this gap, the study employs a dynamic panel estimation approach using the Generalized Method of Moments (GMM), incorporating an interaction term between green bonds and the financial development index to capture conditional effects. The findings indicate that green bonds do not exhibit a statistically significant direct effect on economic growth. However, the indirect model shows that the growth benefits of green bonds are conditional on the level of financial development. The results further reveal substantial heterogeneity across countries, where economies with intermediate levels of financial development experience increasing marginal gains, while highly developed financial systems show diminishing returns, and less developed systems face structural constraints that limit the growth-enhancing effects. These findings underscore the importance of financial system maturity in enabling green finance to contribute meaningfully to economic growth. The study provides policy implications by proposing a stage-based framework, suggesting that economies at early stage of financial development should prioritize institutional strengthening, those at an intermediate stage should focus on financial deepening, while financially advanced economies should enhance market quality and transparency. Overall, the study contributes to the literature by offering a mechanism-based understanding of how financial development conditions the effectiveness of green bonds in promoting meaningful economic growth.