Dynamic Effects of Malaysia's Government Spending on Environment Quality: Bridging STIRPAT and EKC Hypothesis

Abstract

This paper investigates how government spending (GSE) affects the environmental quality proxy by CO2 emissions in Malaysia over the 1978–2020 period. For that purpose, the STIRPAT model in the EKC framework are applied. The F-bounds test is applied to assess the cointegration relationship's existence. The ARDL model is used to measure the short-run and long-run environmental elasticities, and the VECM Granger causality is used to estimate the direction of the causality relationship. Empirical results show a cointegration relationship among environmental quality, GDP, population, and Malaysia's GSE. The findings provide strong support for Malaysia's EKC presence, and the GSE significantly contributes to reducing environmental sustainability. The results show the short-run unidirectional Granger causality running from CO2 emissions, GDP, and population to GSE at the 1 percent significance levels. Also, this study reveals the long-run unidirectional Granger causality running from CO2 emissions and population to GSE and GDP at least at 10 percent significance level; and the bidirectional causality between GSE and GDP at least at 10 percent significance level as well. The result implies that the increasing demand for regulatory and protective functions represented by GSE are needed to sustain the increasing level of economic wealth, environment, and communities.Keywords: Environmental Sustainability, EKC, Government Spending, Dynamic Relationship, Causality, MalaysiaJEL Classifications: O1, O2, Q5DOI: https://doi.org/10.32479/ijeep.11273