Impact of Monetary Policy Uncertainty and Fiscal Policy Uncertainty on CO2 Emissions in the Us

Abstract

Nowadays, environmental degradation is perceived as one of the serious concerns across the globe. One of the prime reasons behind environmental degradation is CO2 emissions. Therefore, researchers are actively putting their efforts to explore the determinants of CO2 emissions to mitigate CO2 emissions. On this basis, the present study contributes to the existing literature by investigating the impact of monetary policy uncertainty (MPU) and fiscal policy uncertainty (FPU) on CO2 emissions (environmental degradation). The current study employs ARDL methodology and uses annual data ranging from 1985 to 2019 for US. The results from the ARDL model report that there is an existence of long-run relationship among the variables. Moreover, MPU escalates the carbon emissions in both short-run and long-run. This implies that increase in MPU is responsible for rise in environmental degradation. On the contrary, FPU plunges the carbon emissions in both short- and long-run. This indicates that increase in FPU decreases the environmental degradation. Findings from the current study propose that policy makers should introduce reforms and launch policies to shrink MPU. Next, this study proposes that rule should be adopted as monetary policy making framework in lieu of discretion. Furthermore, the current study recommends that FPU should not be utilized as a tool to mitigate environmental degradation, because FPU has severe economic impacts.