ENVIRONMENTAL AND MACROECONOMIC DETERMINANTS OF FINANCIAL MARKET DEVELOPMENT: A WORKFORCE-CENTERED ANALYSIS FOR PAKISTAN

Abstract

Environmental quality and core macroeconomic fundamentals have long been recognized as important determinants of financial market performance, particularly in emerging economies such as Pakistan. However, despite this recognition, these factors have often been studied in isolation, failing to capture their integrated and long-run dynamics within the financial development process. To fill this knowledge gap, the study considers the long- and short-run impacts of environmental degradation (proxied by CO2 emissions), exchange rate dynamics, GDP per capita growth, and external debt on the financial market development in Pakistan (proxied by market capitalization) over the period 19802024. Through a unified framework created using the Autoregressive Distributed Lag (ARDL) method resourcing to the endogenous growth and financial development theories, this research weaves the environmental and macroeconomic realms that interactively complement each other. Empirical evidence establishes that there is a constant long-run equilibrium between the variables, with a highly significant negative effect of CO 2 emissions, exchange rate depreciation, and external debt on market capitalization, and a positive impact of GDP per capita growth. The rapid short-run adjustment toward the equilibrium of the error correction model elucidates this aspect. The effectiveness of the model is validated through thorough diagnostic and case tests of stability. This study provides a policy-relevant contribution to fostering workforce-oriented and environmentally sensitive financial market activities in Pakistan by merging macroeconomic stability with environmental sustainability.

Keywords: CO₂ emissions, exchange rate, GDP per capita growth, external debt, ARDL, financial market development, Pakistan