The impact of economic policy uncertainty and geopolitical risk on environmental quality: an analysis of the environmental kuznets curve hypothesis with the novel QRPD approach

Abstract

This study aimed to determine the impact of economic policy uncertainty and geopolitical risk on environmental quality in 17 selected countries. In addition, it also aimed to test the environmental Kuznets curve hypothesis (EKC) within the scope of the determined variables and model. In this context, analyses were carried out with annual data for the period 1997–2022, based on the country group for which the economic policy uncertainty index was calculated, subject to data limitations. In this study, a Quantile Regression of Panel Data (QRPD) analysis, OLS (Ordinary Least Squares), and a panel causality test were used. As a result of the estimation with the Quantile Regression of Panel Data (QRPD), it was found that the increase in economic policy uncertainty had a positive effect on environmental quality in most of the quantiles, while geopolitical risk had significant and negative effects on environmental quality in the medium and high quantiles. The validity of the EKC hypothesis was also proved in the analysis. According to the results of the panel causality test, there was a bidirectional causality relationship between environmental quality and all the independent variables, except the square of economic growth. In order to make a comparison with the new-generation estimation method, QRPD, it was observed that the estimation results with the classical regression method, OLS, were similar. In light of these findings, it is recommended that policy makers pursue strategies that balance economic growth and environmental quality, reduce the environmental impacts of geopolitical risks, and favor a renewable energy transition. Moreover, long-term and stable environmental policies have a crucial role in the success of these strategies.