Economic policy and environmental sustainability: analyzing macroeconomic determinants across the emission distribution in mediterranean countries

Abstract

This study examines the complex relationships between macroeconomic policies and environmental pollution in Mediterranean countries through the lens of quantile regression analysis. Drawing on panel data from 19 Mediterranean nations spanning from 1990 to 2024, we investigate how fiscal, monetary, trade, and exchange rate policies affect CO2 emissions across different points in the pollution distribution. Our findings reveal significant heterogeneity in policy effects, with explanatory power increasing substantially from lower to higher emission quantiles. Fiscal constraints, represented by public debt levels, demonstrate increasingly positive associations with pollution as emission levels rise. Monetary policy instruments show varying effects, with interest rates positively associated with emissions particularly among high polluters, while credit expansion exhibits a transition from negative to positive effects across the distribution. Trade openness consistently shows negative relationships with emissions, contradicting the pollution haven hypothesis for this region. Exchange rate appreciation is associated with higher emissions, with effects strengthening at upper quantiles. To address potential endogeneity concerns, we employ a two-stage quantile regression approach, which confirms these patterns while highlighting the critical roles of fossil fuel consumption and renewable energy in determining emission outcomes. The results underscore the importance of integrated policy approaches that account for differential effects across pollution levels and emphasize the need to incorporate environmental considerations into core macroeconomic policy frameworks. These findings contribute to our understanding of the macroeconomic–environmental nexus and offer insights for designing more effective environmental governance systems in the Mediterranean region.