A new approach to environmental sustainability: Assessing the impact of monetary policy on CO2 emissions in Asian economies

Abstract This paper offers a unique perspective in the field of environmental economics and research by linking CO 2 emissions (CO 2 e) and monetary policies. Through a newly‐developed predictive model, the study estimated the impact of monetary policies on CO 2 e along with control variables, including income, remittances, urbanization, fossil fuels, and human capital in selected Asian economies for the period 1990–2014. Data were analyzed using the Pedroni and Kao co‐integration tests, panel fully‐modified (PFM‐LS), and panel dynamic least squares (PD‐LS) techniques for data analysis. Some of the main findings are as follows. First, the results showed a significant long‐term positive relationship between expansionary monetary policy and CO 2 e. Second, the contractionary monetary policy serves an effective measure to mitigate CO 2 e. Third, improvements in human capital have a positive impact on reducing CO 2 e. Fourth, remittances and fossil fuels are also prime determinants of CO 2 e. Based on the present findings, the paper proposes important implications and a predictive tool for policymakers to design effective policies and strategies for reducing CO 2 e.