Sustainability 15 07907 v2

sustainability
Article
Determinants of Green Innovation: The Role of Monetary
Policy and Central Bank Characteristics
Eleftherios Spyromitros
Department of Economics, Democritus University of Thrace, 69100 Komotini, Greece; espyromi@econ.duth.gr
Abstract: The current global energy crisis has prompted a comprehensive investigation into its
influencing factors. It is hypothesised that a set of monetary, macro-environmental, and institutional
variables causally affect the transition to green development in a holistic model. Monetary expansion
and central bank characteristics are required for economic and environmental development. The
current study investigates and rigorously verifies the impact of expansionary monetary policy actions
on green innovation, using a panel of 109 countries from 2010 to 2018. Overall, specific actions
have a substantial positive effect on the performance of green innovation. A rise in per capita
GDP, government spending, and improvement in bureaucracy all promote green economic activity.
Green innovation is significantly affected by developing nations’ central bank independence and
lower interest rates. Expansionary monetary policy, central bank transparency, and energy variables
promote green growth in developed countries and green innovation in Latin American countries
and in East Asian and Pacific countries. Finally, green innovation is more affected by expansionary
monetary policy in countries with high institutional quality, industrial concentration, and energy
intensity, and inflation and trade openness serve as deterrents in the monetary expansion–green
development nexus.
Keywords: monetary policy; central bank characteristics; green innovation; sustainable development;
energy policy
Citation: Spyromitros, E.
Determinants of Green Innovation:
1. Introduction
The Role of Monetary Policy and All countries, particularly developing ones, face numerous environmental difficulties
Central Bank Characteristics. while pursuing economic growth [1,2] (Beckerman 1992; Zhang and Wen 2008). Degrada-
Sustainability 2023, 15, 7907. https:// tion of the environment and ecological disasters today incur such enormous costs that they
doi.org/10.3390/su15107907 pose important questions about sustainable development [3]. Developing a sustainable
Academic Editors: Manzoor Ahmad
development plan that achieves a “harmonious symbiosis” between development and
and Shoukat Iqbal Khattak the environment is a global concern [4,5]. A sustainable development strategy is sought
to adhere to the objectives of green economic development while actively addressing
Received: 31 March 2023 environmental concerns [6–8].
Revised: 1 May 2023 Transitioning to a low-carbon world will necessitate substantial investments in “green”
Accepted: 8 May 2023
industries [9–12]. From a macroeconomic standpoint, investment is expenditure; it consists
Published: 11 May 2023
of the purchase of investment products and services that will be employed to manufacture
some consumer item. To undertake investments, businesses evaluate their risk and prof-
itability. Companies that can quickly modify the traditional model of supplying products
Copyright: © 2023 by the author.
and services and carry out green innovation and reform will have a greater competitive
Licensee MDPI, Basel, Switzerland.
advantage [13,14]. In the classic economic development model, environmental pollution,
This article is an open access article resource restrictions, and ecological degradation obstruct economic progress. To achieve
distributed under the terms and a “win-win” development of economic transformation and environmental protection, in-
conditions of the Creative Commons vestments in green innovation must be embraced [15]. Investment, like any other type of
Attribution (CC BY) license (https:// spending, necessitates the availability of sufficient financial resources. Given the up-front
creativecommons.org/licenses/by/ costs of investments, which are particularly expensive in the case of renewable energy
4.0/).
Sustainability 2023, 15, 7907. https://doi.org/10.3390/su15107907 https://www.mdpi.com/journal/sustainability

Sustainability 2023, 15, 7907 2 of 23
production, businesses are often unable to finance them with their savings and, thus, re-
quire external financing. In other words, they must borrow funds from a third party before
they invest.
Clean energy financing mobilisation is essential for limiting global warming to 1.5 ◦ C
and preventing catastrophic climate change [16]. A total of 1.5 trillion USD must be invested
annually in green initiatives [17]. With estimates for the year 2020, the corresponding
investments are at one-third of the assets required [18]. Numerous nations have established
measures to encourage renewable energy investment by lowering these obstacles [19].
After the 2008–2010 financial crisis and its aftermath, the number of inventions related to
environmental concerns has risen. This process is regulated by numerous factors, many of
which are examined in this research study.
Monetary policy is one of the major variables affecting innovation in the green sector.
It has only recently been researched in the literature, but not thoroughly enough [20]. By
balancing the portfolio, an expansionary monetary policy boosts consumption and energy
use by directly supplying money or lowering interest rates [21]. As a result, the demand
for products will increase across all markets. Industrialists prefer to use conventional
manufacturing processes if innovation-related financing is offered at a higher interest rate.
An increase in pollutant emissions is caused by a rise in the consumption of less ecofriendly
technologies [22]. Similarly, the supply channel contends that expansionary monetary pol-
icy encourages economic growth, motivating consumers to purchase renewable goods and
pressuring producers to increase the output to satisfy the increased demand. By utilising
green innovation, more renewable energy products may be produced for less money.
The signing of the Paris Agreement and the United Nations 2030 Agenda for Sus-
tainable Development in 2015 ignited a burst of efforts by central bankers to mobilise the
resources required to achieve the transition to a carbon-neutral economy. Central banks
are in charge of “efficient green finance” by pricing climate risks due to financial regula-
tory monitoring on money and credit flows [23,24]. Central bankers have recently been
addressing the risks of climate change uncertainty to monetary and financial policy [25,26].
However, it would be inaccurate to refer to these financial institutions as “green central
banks” [27]. The two main characteristics of central banks are independence and trans-
parency. They are directly related to the process and policy basis upon which the central
bank makes decisions [28–33]. The present study analyses these two characteristics in the
context of a mainly monetary model to determine the channels and processes through
which they operate and how they relate to green innovation [34,35].
According to the research, environmental innovations are crucial to shifting to a green
economy. By analysing the topic from all angles, we attempt to pinpoint the key variables
affecting the quality and quantity of green innovation in this research. We also examine
various other factors that appear to impact the green economy, with a particular emphasis
on monetary policy and the features of central banks that are typically positively con-
nected with it. Fiscal policy uses government spending and GDP per capita, which seem
to advance green innovation [36,37]. Bureaucracy [38] and institutional quality [39] are
employed in relation to institutional variables. CO2 emissions [40], energy intensity, and
losses in production, transportation, and distribution were included as energy variables.
Trade openness [3,41] and economic freedom [42] were utilised as trade liberalisation fac-
tors since they appear to have an increasing impact on green innovation. The effects of
population and urbanisation [43,44], industrialisation [3], inflation [45], and central govern-
ment debt [46] were also tested as a final analysis of heterogeneity and moderating effects.
This study specifically addresses the following research questions: Does an expansionary
monetary policy impact green innovation? How do the characteristics of central banks
influence the above effect? Do these relationships differ or have any similarities across
different world regions? Are there economic, energy, institutional, or additional factors
and moderating effects that differentiate these effects, and if so, how do they differ? These
questions necessitate a more thorough and accurate examination and help in addressing
the issue comprehensively.
By treating the factors that influence green innovation holistically in this research, we
attempt to fill in the gaps in the literature. Our work differs from and complements the
existing literature in various ways. First, by using the same effect model, we conclude that
monetary factors (money supply and interest rates) and central bank features (independence
and transparency) could enhance the green economy. Second, additional robustness tests
are conducted. They modify the measuring indicators of green innovation to continue the
empirical investigation and provide consistent results. In addition, we employ various
static (FE, RE, PCSE) and dynamic (PCSE (ar1), FM–OLS) econometric techniques to
further account for lag effects, cross-sectional dependence, and endogeneity concerns.
Simultaneously, a model of 109 countries is examined to assess the change in the correlation
of variables in the period following the financial crisis (2010–2018). Third, numerous
heterogeneity analyses are performed, with geographic region disaggregation being the
most prominent. We show that expansionary monetary policy boosts green innovation in
Latin American countries (LAC) and East Asian and Pacific (EAP) countries and reinforces
the model more than in Sub-Saharan and African (SSA) and Middle Eastern and North
African (MENA) countries. At the same time, we carry out specialised analyses of factors
in developing and developed countries separately. In addition, the sample is divided based
on institutional, social, energy, and liberalisation policy variables (high-low) to study the
model’s coherence and the differences in variable intensities. Finally, we demonstrate how
certain variables, such as inflation (a result of monetary policy), population (a result of
social policy), trade freedom (a result of government policy), and losses in the distribution
of energy (a derivative of energy policy) act as moderating factors on the relationship
between monetary policy and green innovation.
The remainder of the paper unfolds as follows: Section 2 comprises the theoretical
background. The third section analyses the methodology and the data used. Section 4
elaborates on the findings and robustness checks. Finally, Section 5 concludes the study.
2. Theoretical Background
Several monetary policies, energy policies, and other main macroeconomic and insti-
tutional factors are mentioned in the existing literature that might affect green innovation.
Monetary policy factors concentrate on the money supply, interest rate, inflation, and
central bank characteristics, while energy policy factors encompass energy prices, energy
intensity and losses, and current greenhouse gas emissions. Other leading macroeconomic
and institutional factors involve economic development, government expenses, trade
freedom, institutional quality, and the implementation of competitive markets.
2.1. Monetary Policy Factors

As previously stated, there is a substantial investment gap between current levels and
what would be required to transition to an environmentally friendly economic structure [47].
According to Campiglio [23], a weak macroeconomic climate after the financial crisis and
an unappealing risk-return profile are the primary obstacles impeding adequate financial
backing for green innovation efforts. According to popular thinking, these two crucial
characteristics may be closely related to monetary policies. Studies that explored whether
expansionary monetary policy affects the transition to a green economy through innovation
reached a positive conclusion [41,48,49]. Broad money (M2) and the real interest rate are
the two most frequently cited variables in the literature for monetary policy concerning the
green economy.
Lv et al. [50] showed that environmental restrictions have a substantial role in miti-
gating the impact of an increase in financial availability on green innovation. Therefore,
firms or other economic participants subject to more stringent environmental regulations
may be incentivised to reduce compliance costs, increasing the potential demand for
green innovation in the economy and directing more of the additional real purchasing
power generated by expansionary monetary actions into green innovation-related activi-
ties. Yin et al. [41], utilising a panel of 133 countries covering the period of 1960–2018 and
employing broad money and reserve money as monetary variables, demonstrated that
expansionary monetary policy has a considerable beneficial impact on the efficacy of green
innovation. Zhao et al. [51] achieved similar outcomes. Wen et al. [3] demonstrated that
a moderately expansionary monetary policy helps reduce the issue of corporate finance
limitations and encourages businesses to engage in exploratory green innovations that are
beneficial to their long-term development.
Egli et al. [52] investigated empirical data in Germany and 133 photovoltaic and wind
installations over 18 years. They found that reducing the real interest rate leads to a long-
term improvement in using innovative processes in renewable energy sources. In addition,
Hashmi et al. [20] found that an increase in the real interest rate results in a depreciation of
the currency rate. This exchange rate depreciation inhibits imports of renewable energy
goods, resulting in a decline in renewable energy use in the economy. Research has also
examined how monetary policy affects the environment. Qingquan et al. [53] reviewed
Asian economies from 1990 to 2014 and showed that a growing money supply caused rising
CO2 emissions. A contractionary monetary policy, however, would decrease investments
in technical innovation and could reduce the likelihood of producing greener technologies,
which could eventually harm the environment. In addition, expansionary monetary policy
may raise aggregate demand via growing consumption and investment activity. Hence, an
expansionary monetary policy may contribute to environmental degradation if the energy
sector does not convert to cleaner sources throughout the expansionary period [54].
Finally, the effect of inflation (as a result of monetary policy) on green growth has
also been investigated. Typically, inflationary high fossil fuel energy prices encourage
the search for alternate and renewable energy sources [45]. In addition, Bird et al. [55]
showed that high wholesale power rates enhance the relative competitiveness of wind
energy generation in the United States. According to the findings of Chang et al. [56], a
greater variance in the consumer price index may be positively associated with renewables’
contribution to the energy supply.
Central banks play a vital role in implementing countries’ monetary policies. How
they conduct business influences the manner in which they engage in politics. Thus, their
primary characteristics, namely, independence and transparency, must be analysed in terms
of their impact on the implementation of energy policy. By comparing the green policy
actions of 135 central banks, Dikau and Volz [34] found that just 12% of central banks have
explicit sustainability mandates, while 40% are mandated to assist the government’s policy
aims, the majority of which include sustainability goals. To ensure macro-financial stability,
all institutions should incorporate climate-related physical and transition risks into their
policy frameworks, given that climate risks can directly impact central banks’ conventional
core responsibilities. From this perspective, their independence will facilitate the adoption
of greener policies. According to D’Orazio and Popoyan [57], the decision to implement
green rules is dependent not only on the mandate, but also on the independence of the cen-
tral bank and the nature of the interplay between monetary and prudential policy. A central
bank that hosts green prudential regulation under its governance roof can prevent conflicts
between monetary policy and green regulation due to linked transmission processes.
Simultaneously, central banks, whose independence is a vital instrument, should make
defensive and awareness-raising efforts to guarantee resilience in the face of increasing
climate-related threats and to secure the consistent and continuous conduct of monetary
policy [58]. Finally, in their research, Yin et al. [41] find that expansionary monetary policy
actions have a more significant positive impact on green innovation activities in economies
with higher levels of central bank independence, an adequately developed stock market,
and better protection of property rights. They indicate that central bank independence, stock
market development, and property rights are crucial in transmitting monetary policies. In
addition, they discovered that, compared to Western countries, Asian emerging economies
are associated with much poorer central bank independence performance.
The preceding discussion demonstrates that expansionary monetary actions contribute
to alleviating the risk premium and a depressed macroeconomic environment, the two
primary factors inhibiting appropriate financial support for green innovation efforts. Hence,
we draw the following central hypothesis of our study: Expansionary monetary policies
improve the performance of green innovation. It also emerges from the preceding lit-
erature review that research on the effect of monetary policy on green innovation has
been conducted variable by variable. We address this deficiency by employing a holistic
approach and incorporating the most significant monetary policy variables into the same
model to investigate their effect on green energy. By evaluating the disparities between
advanced and developing countries and regions of the world, our findings are signifi-
cant and contribute to the complex decision making required for monetary expansion for
sustainable development.
2.2. Energy Policy Factors

This section examines the impact of energy and environmental variables on green
innovation, starting with energy consumption. It is widely recognised that energy con-
sumption positively influences green innovation through economic expansion and the
pressure it imposes on environmental degradation [59].
The consumption of energy is typically associated with modernisation and economic
prosperity; however, energy consumption also creates environmental issues in nations
around the globe [60]. Much empirical research has been conducted on the relationship
between energy use, economic development, and green innovation. In most of these
studies, the subject of environmental pollution frequently arises [61,62]. Green growth is
essential for lowering greenhouse gas emissions and sustaining global economic growth.
Considering that 70% of emissions result from excessive energy consumption, energy
efficiency is a crucial subject [59]. In recent years, governments have heavily invested
in developing green technology and innovation to increase energy efficiency. Likewise,
government entities have been given the authority to oversee the execution of energy
programs that increase energy efficiency [60].
The overconsumption of traditional fossil fuels is thought to be the cause of climate
change, which is currently the most significant environmental concern confronting the
world [63]. According to several studies, environmental pollution can stimulate technologi-
cal innovation. Su and Moaniba [64] used data from 70 countries to investigate whether
technological innovation is sensitive to shifts in the surrounding environment. According
to their research, the CO2 emissions released by burning gas and liquid fuel promotes tech-
nological advancement. Several academics have made similar observations; for example,
Costantini and Crespi [65] argued that the massive volume of CO2 emissions have helped
technological advances in renewable energy. From an energy consumption and structure
standpoint, energy is the driving element for sustainable economic expansion. Coal and
oil dominate global energy consumption [66]. Nonetheless, the increased pressure from
carbon dioxide emissions is forcing authorities to develop new methods for producing
green energy.
Energy intensity (the amount of energy consumed per unit of total output) is one
variable that may influence the relationship between monetary expansion and green inno-
vation. Energy intensity should drop in countries where renewable energy sources replace
conventional ones. In a sample of 18 OECD nations, Wurlod and Noailly [67] found that
green innovation contributed to the drop in energy intensity in most industries. Thus, a
1% increase in green patenting efforts in a specific sector is related to a 0.03% reduction in
energy intensity. The influence is more significant in energy-intensive industries and in
recent years. In addition, they show that the effect of an additional green patent on energy
intensity is more powerful than that of a typical non-green patent. This study evaluates if
energy intensity influences the process of monetary expansion and the impact of central
bank characteristics on green innovation. By this method, we expand the existing body of
literature by examining the current relationship from both sides.
Finally, one of the relationships that is explored is whether the energy losses that occur
throughout production, distribution, and consumption are related to the development of
green innovation. According to Oseni [68], providing new energy sources promotes eco-
nomic growth and sustainability. The author provided a case study of Nigeria, where 40%
of the population lacks access to electricity and relies on traditional ways. The author dis-
covered significant energy distribution losses due to faulty equipment, as the data revealed
a 4.49% decrease in the 2008 electricity distribution compared to 2007. Dokas et al. [69],
based on a sample of 109 countries, determined that energy losses result in a significant
decrease in energy consumption in developed economies (−3.5%). The losses may be
replenished from renewable sources. Shahbaz et al. [70] came to similar conclusions. The
literature has explored the correlation of energy losses with energy use indirectly impacting
green innovation rather than directly. In this work, we analyse whether energy losses
increase or detract from the influence of expansionary monetary policy on the development
of green energy, i.e., whether they act as a moderator.
As observed from the literature review above, while the research is replete with studies
on energy policy and its environmental implications, few correlate these variables with
green innovation. Furthermore, these efforts appeared fragmentary, with models that
employed limited variables. The present research aims to fill this gap in the literature.
2.3. Other Main Macroeconomic and Institutional Factors

In addition to the above-mentioned factors, other macroeconomic variables influence
green innovation. The effect of fiscal variables, in particular, has been researched, and these
variables cannot be excluded from a comprehensive framework.
In his study of 18 countries from 1994 to 2003, Sadorsky [71] discovered that real
per capita income increases positively, and statistically significantly impacts per capita
renewable energy usage. Long term, a 1% rise in real income per capita boosts renewable
energy consumption per capita in emerging economies by around 3.5%. Chang et al. [56]
found in their study of OECD countries for the period of 1997–2006 that countries with high
economic growth can respond to high energy prices by increasing their use of renewable
energy. In contrast, countries with low economic growth tend to be insensitive to energy
price changes once they reach their level of renewable energy. Wang et al. [36], in their
study of 57 developing nations during the period of 2002–2016, found, among other issues,
that an increase in economic growth leads to a substantial increase in green finance and
green innovation. Similar outcomes are observed by other researchers [50,72].
Green innovation may suffer from government expansion. A suitably sized gov-
ernment increases marginal productivity and green innovation by boosting government
expenditure. Still, an excessively sized government generates a substantial administrative
agency that raises the tax burden and undermines social welfare by excessive interference.
So, government size may not linearly affect green innovation. Wen et al. [37] found an
inverted U-shaped association between government size and green innovation in 166 coun-
tries between 1995 and 2018, suggesting that optimal government size may optimise green
innovation output. They also found that countries with high organisational inertia and
high R&D spending have a stronger inverted U-shaped association. Przychodzen and
Przychodzen [45], in a study of 27 transition countries from 1990 to 2014, determined that
economic growth, unemployment, government expenditures, and rising government debt
served as stimulants for renewable energy production. Wang et al. [73] conducted research
into the connection between government subsidies and green technology innovation in
China’s provinces from 2003 to 2017 and revealed, among other findings, a positive corre-
lation between government spending and green development. A similar conclusion was
reached by Sun and Razzaq [74], analysing 32 OECD countries. The above variables were
considered fiscal influence factors on green growth in the literature. In our research, these
are employed as control factors to derive their effect in a primarily monetary model, from
which we derive implications regarding the impact of monetary policy on green innovation.
Trade openness and economic freedom are additional aspects of the liberalisation of
transactions that have been examined. Facilitating international transactions generally
provides businesses with more opportunities, imports, and partnerships. Concurrently,
increased competition from foreign enterprises drives domestic firms to seek resources
(provided by monetary policy and central banks) for greater innovation [75]. Nonetheless,
many research studies contend that the increased activity harms the environment. Accord-
ing to a scientific article by Ding et al. [76], increased trade openness benefits the ecological
integrity of the G-7 countries. Ibrahim and Ajide [77] also indicated that trade openness
reduced environmental problems for the G-20 nations and 48 Sub-Saharan African nations
from 2005 to 2014. Yin et al. [41] and Wen et al. [3] drew similar conclusions. In contrast,
Khan et al. [78] found experimental evidence that trade openness degrades environmental
quality in Pakistan by increasing CO2 emissions. Van Tran [79] showed that trade openness
improved environmental quality in 66 emerging countries from 1971 to 2017, indicating sim-
ilar tendencies. Khan and Ozturk [80] found that trade openness increased CO2 emissions
in 88 countries between 2000 and 2014.
Economic freedom, according to researchers, has a favourable impact on green
growth [42]. Using a panel of 67 countries from 1995 to 2019, Liu and Feng [81] demon-
strated that economic freedom and technological innovation favour green total factor
productivity in both the global and regional panels at different income levels. In their
study of 71 developed and developing countries between 1990 and 2014, Sun et al. [59]
concluded, among other issues, that economic freedom enhances green innovation. Lastly,
we examine the impact of institutional variables on the relationship between monetary
policy and green growth. The impact of institutional quality on green development has
been extensively discussed in the literature. According to Berrone et al. [82], environmental
regulations benefit green technology innovation, and institutional pressure can motivate
businesses to raise R&D expenditures. Across 71 nations, Sun et al. [59] discovered that in-
stitutional quality and green innovation positively influence energy efficiency. In addition,
potential approaches include giving subsidies for research and development, mandating
green innovation, improving communication between governments and businesses, etc., to
encourage enterprises, individuals, and organisations to increase their creation of innova-
tive technologies [83]. Finally, in a sample of 133 countries from 1960 to 2018, Yin et al. [41]
demonstrated that institutional quality influences green innovation.
To sum up, efforts have been undertaken in the literature to establish the impact
of monetary policy on green growth. To explore the phenomenon through the issues
of endogeneity and cross-sectional dependence, however, few works have dealt with
concurrently incorporating many monetary variables into a model. In the present study, we
employ a holistic model that includes not just strictly monetary factors but also the impact
of central bank characteristics on the relationship between expansionary monetary policy
and green innovation. Simultaneously, we examine the effects using regional analysis to
highlight the similarities and differences between the results in various regions. Lastly,
we introduce a variety of additional variables to explore their potential impact on the
investigated nexus.
3. Data and Methodology

3.1. Data and Variables
3.1.1. Data
We use panel data from 109 countries (see Appendix A) (developed and developing)
for 9 years (2010–2018). The choice of the period and countries stems from our intention to
study the period after the financial crisis. In addition, a sufficient and complete data set on
the variables used for this period is necessary for using the highly restrictive econometric
method FM–OLS. Table 1 presents the descriptive statistics and definitions of the variables
used in this research.
Table 1. Descriptive statistics (981 observations, 109 countries).
Variables Disambiguation Source Min. Max. Mean St. Dev.

LENVPAT Ln(Total number of envir. Related techn.
OECD, WDI −5.177741 6.438482 1.737711 2.103058
(per capita) Patents p.c.)
Ln(Patent applications, all (per capita,
LPAT (p.c.) WDI −3.248097 8.340181 3.650523 2.230593
per million))
BRM M3% Sum of narrow money and other
WDI 10.10652 699.197 76.10276 73.81916
GDP assets-Broad Money
INTRT Real interest rate (X 100) WDI −64.38082 52.43679 5.28662 8.03546
CBI Central bank independence index (0 and 1) Garriga [84] 0 1 0.53313 0.49916
Central bank transparency index DEG group
CBT 0.5 14.5 7.559123 3.537492
(Eichengreen’s online database) [85]
GDP per capita fixed USD prices (2011)
LGDP WDI 6.49193 11.45042 9.451556 1.125927
(PPP)
GEXP
General Gov. Expenses (% of GDP) WDI 4.403315 73.57668 16.3179 6.037289
(%GDP)
Fraser
BUR Bureaucracy index 3.272567 9.2726 6.583437 1.130936
Institute
Average temperatures over three
TEMPWIN WB, CCKP −25.42333 28.56333 11.08565 12.18566
winter months
CO2EMMS CO2 emissions WDI 0.026146 22.61852 4.755074 4.571762
LENVPAT: logarithm of environmental patents, LPAT: logarithm of total patents, BRM: broad money (M3% of
GDP), INTRT: real interest rate, CBI: central bank independence, CBT: central bank transparency, GEXP: govern-
ment expenditure (% of GDP), LGDP: logarithm of GDP, BUR: bureaucracy index, TEMPWIN: temperature winter,
CO2EMMS: CO2 emissions, PPP: power purchasing parity. Sources: WB, OECD, Garriga [84], Eichengreen’s
online database, Fraser Institute, CCKP 2022, and DEG group [85].
3.1.2. Dependent Variable

Our study’s environmental management innovation represents green advancements
(proxied by Patent). According to Griliches [86], patent applications are a good indicator of
innovation. Most countries track patents, making them an excellent indicator of innovation.
Following Cai et al. [87] and Yin et al. [41], we use environmental patents (ENVPAT), the
total number of environmental-related technology patent applications in each country
(recorded in OECD statistics) per capita (1,000,000 residents and non-residents), as a proxy
for green innovation. Environmental management innovation is an indicator. Its sub-
indicators include air, water, waste, soil, and environmental monitoring, and represent
a country’s total number of environmental inventions (primary patent families). The
OECD statistics provide 1990–2019 environmental management innovation data. The
dataset includes patent numbers and metrics to track environmental protection technology,
help governments create environmental and innovation policies, and assess business and
national innovation performance.
3.1.3. Explanatory Variables

This article assesses the impact of monetary policy and central bank characteristics
on green innovation. Several researchers have utilised the real interest rate variable for
monetary policy [20,21,46]; however, in recent years, M3 as a proportion of GDP (Broad
Money) has also been used [3,23,41]. We use both variables as monetary policy deter-
minants (INTRT and BRM). Central bank characteristics are determined by central bank
independence (CBI) [84,88,89] and central bank transparency (CBT) [34,85]. All variables
are calculated from the years 2010 to 2018.
3.1.4. Control Variables

We employ a variety of control variables following the pertinent literature on green
innovation. A country’s thriving economy provides financial support for advancing
environment-related technologies. Gross domestic product (GDP) is typically used to
measure economic progress. Consequently, we follow Wang et al. [36] and utilise GDP per
capita, evaluated in constant 2011 US dollars (LGDP), to reflect the economic development
level of the nations studied (proxied by GDP–PPP). Scholars have also proven the signifi-
cance of government size in innovation, green innovation, and economic growth [37,90].
Following Wen et al. [37], the size of the government is determined by the ratio of domestic
consumer spending to GDP in this article (GEXP).
Many models that explore green innovation and growth include bureaucracy [3,91,92].
We anticipate that this development will improve green growth through greater trans-
parency and more efficient resource allocation [38,39] (BUR). We also include the variable
of extreme climatic events [3,93], represented by extremely cold winter temperatures [94]
(TEMPWIN). According to D’Orazio and Popoyan [27], the demand for green innovation
increases as environmental conditions deteriorate. The final variable used is carbon dioxide
emissions [39,45], where we expect a positive association [66,95] (CO2EMMS). Table 1
shows the descriptive statistics of the variables used.
3.1.5. Data Quality

Most of the variables are drawn from the World Bank’s (WDI) database, as seen in
Table 1. The variables not retrieved from this database are the bureaucracy (BUR) and
central bank variables (CBI and CBT). The World Bank assessed the bureaucracy, but it
took the form of corruption, which we chose not to include in the model because the
institutional variable has a more significant impact. In addition, two databases (OECD and
CCKP) were used to retrieve the variables ENVPAT and TEMPWIN, which use qualitative
standards comparable to those of the World Bank. Because the databases mentioned above
are known for their unique qualities and are frequently used in the literature, the data
demonstrate completeness, consistency, and conformity. They exhibit uniqueness and are
strictly balanced, both of which were verified using the STATA econometric tool. We must
emphasise that only balanced data with no missing values can be successfully applied to
the FM–OLS approach for panel data. Over 170 countries have variables from the WDI,
112 countries from the DEG group, 110 countries from Garriga’s CBI, and over 160 countries
from the Fraser Institute’s bureaucracy. From these sources, the data were obtained for
109 countries, which is the maximum number for which there were complete data and a
correct statistical distribution between regions according to the World Bank’s information
(40 European and Central Asian countries (ECA), 17 Latin American and Caribbean nations
(LAC), 14 East Asian and Pacific nations (EAP), 9 Middle Eastern and North African nations
(MENA), and 24 Sub-Saharan and African countries (SSA)).
The percentage variables were taken as is (BRM, GEXP, TEMPWIN, INTRT, CO2EMMS,
INFL, POP, TROP, ENRGLOS), and the numerical variables were taken as logarithms
(LENVPAT (p.c.), LPAT (p.c.)), and as per capita for comparison reasons. The variables that
represent the survey results (CBT and BUR) remained unchanged, the CBI variable was
changed to a binary variable (0 or 1) because it presents temporal stability, and the variables
for sample separation (INSQL, ENERINT, INDUST, URBAN, CGDEBT, and ECFRD) were
obtained as high and low by dividing our samples in half so that the samples could be
compared. Finally, the data are timely because they were only collected for the years
following the 2008–2009 financial crisis, excluding the pandemic period, which would have
changed how the results could be interpreted.
The equation of the empirical model contains broad money, real interest rate, central
bank independence, and central bank transparency as essential independent variables,
while GDP per capita, government expenses, bureaucracy, extreme weather conditions,
and CO2 emissions are the control variables. The equation of the dynamic OLS system is
as follows:
m d
yit = β0 + ∑ j=1 β j xit + ∑r=1 ar zrit + ηt + µi + υit
j
(1)
j
where yit is green innovation, xit is broad money (BRM), real interest rate (INTRT), central
bank independence (CBI), and central bank transparency (CBT). The zrit are the control
variables, i.e., LGDP, GEXP, BUR, TEMPWIN, respectively, and CO2EMMS. µi refers to
the constant individual effect of each country’s attributes, ηt signifies the time effects, and
υit represents the time-dependent error. The study of the variables and correlations of
our research necessitates more dynamic data because our results must consider both time
and differences between countries. This leads us to the panel data analysis. The proposed
study includes initial correlations with fixed terms and the application of the Hausmann,
Woolridge, Modified Wald, Breusch–Pagan, Pesaran, and Frees tests, where the model
appears to have heteroscedasticity, autocorrelation, and cross-sectoral dependence. To
handle and mitigate the issue of cross-sectional dependence, the panel-corrected standard
errors (PCSE) methodology is used [96]. The PCSE and PCSE (AR1) models are used for
correction [97]. Finally, to address the potential effect of the variables’ past values (mainly
through time lags) and the endogeneity problem, we apply a dynamic OLS methodology,
which considers past and future temporal effects on the variables.
Additionally, we use the FM–OLS method to deal with endogeneity issues and the
problems of omitted variables. Initially, we examine whether the variables in the model are
stationary. Since the variables under investigation are cointegrated, we can estimate their
relationship in the long-run equilibrium state. When applied to cointegrated panels, the
least-squares method (OLS) leads to discriminatory estimators, especially when the sample
size relative to periods (t) is small. Therefore, we estimate the long-run equilibrium function
with the FM–OLS procedure proposed by Pedroni [98] to calculate the valid t-statistics.
This approach yields more reliable results when heterogeneity in the integrated variables
is diagnosed. The primary equation used in the FM–OLS model is (1). The constant β0
j
includes the heterogeneity of each country, which may differ. The xit and zrit variables are
first-order integrated, and the error term tends asymptotically to the normal distribution.
The pooled panel FM–OLS estimators allow cross-section dependence, which also
relies on the assumption of cross-sectional independence. This was proposed by Kao
and Chiang [99] and Mark and Sul [100] and has provided more reliable results when
heterogeneity is diagnosed in the cointegrated variables [101].
4. Results and Discussion

4.1. Preliminary Tests of Econometric Analysis (FM–OLS Methodology)
4.1.1. Unit Root Tests
We use unit root tests introduced by Levin, Lin and Chu, Breitung, Maddala and
Wu, and Choi (Augmented Dickey–Fuller test). The results in Table 2 show that green
innovation, total innovation, broad money, real interest rate, central bank independence,
central bank transparency, GDP per capita, government expenses, bureaucracy, extreme
weather conditions, and CO2 emissions are stationary in the first differences. The null
hypothesis of non-stationarity is rejected at a 99% significance level for most tests.
4.1.2. Cross-Sectional Dependence (CSD) and Panel Cointegration Results

The unit root tests assume that the cross-sectional units of the data panels are not
strongly correlated. Next, we run the CSD tests proposed by Pesaran and Frees for the
models containing 5, 7, and 10 variables.
Cross-sectional dependence is confirmed in all models, thus implying that one change
in one country will likely affect others. This process occurs as similar processes between
neighbouring countries across several areas such as tourism, free trade rules, legislation,
governance, bureaucracy, etc. [102]. A typical example is the European Union, NAFTA,
Latin American countries, and South Africa. To handle the issue of cross-sectional depen-
dence, the PCSE methodology is used in addition to FM–OLS econometrics [103,104].
To apply FM–OLS econometrics, we adopt panel cointegration tests proposed by Kao,
Pedroni, and Westerlund to determine the possible existence of a cointegrated vector in our
essential variables. The results show cointegration between the model’s main variables,
LENVPAT or LPAT as the dependent variable, INTRT, BRM, CBI, CBT, LGDP, and GEXP as
regressors, and a long-term equilibrium relationship.
Table 2. Unit root test results.
Variables LLC BREITUNG ADF–FISHER

I (0) I (1) I (0) I (1) I (0) I (1)
−17.8638 *** −25.0319 *** −2.4942 *** −10.8627 *** −5.5783 *** −29.1441 ***
LENVPAT
(0.000) (0.000) (0.006) (0.000) (0.000) (0.000)
−4.2199 *** −23.2980 *** 1.7826 −9.2141 *** −6.1754 *** −26.8931 ***
LPAT
(0.000) (0.000) (0.963) (0.000) (0.000) (0.000)
−6.8127 *** −18.5995 *** 5.2999 −8.0925 *** 4.1314 −20.1151 ***
BRM
(0.000) (0.000) (1.000) (0.000) (1.000) (0.000)
−0.1758 −19.2161 *** −2.586 *** −10.1021 *** −14.0642 *** −38.2400 ***
INTRT
(0.430) (0.000) (0.005) (0.000) (0.000) (0.000)
7.6032 −5.795 *** 3.6651 −7.5163 *** 1.8560 −31.3916 ***
CBT
(1.000) (0.000) (0.999) (0.000) (0.968) (0.000)
−6.8053 *** −23.6136 *** 14.9109 −3.0600 *** −1.0350 −17.0195 ***
LGDP
(0.000) (0.000) (1.000) (0.001) (0.151) (0.000)
−13.4925 *** −23.9109 *** 2.0076 −3.0600 *** −1.4094 * −22.5909 ***
GEXP
(0.000) (0.000) (0.978) (0.001) (0.080) (0.000)
−21.4848 *** −22.0046 *** 1.7007 −10.1051 *** −1.8740 ** −23.3768 ***
BUR
(0.000) (0.000) (0.956) (0.000) (0.031) (0.000)
−10.2416 *** −24.8454 *** −6.8882 *** −8.9330 *** −23.3454 *** −38.4535 ***
TEMPWIN
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
−13.0539 *** −19.0209 *** 3.2047 *** −8.8778 *** −2.8411 *** −14.2553 ***
CO2EMMS
(0.000) (0.000) (0.999) (0.000) (0.002) (0.000)
Notes: p-values in parentheses. *, **, and *** indicate 90%, 95%, and 99% statistical significance, respectively. All
abbreviations and sources are the same as in Table 1 with the author’s calculations.
4.2. Empirical Results and Discussion

4.2.1. Key Conclusions of the Empirical Model
Table 3 demonstrates a positive link between broad money and green innovation in
109 countries and the econometric methodologies used at the 1% significance level. This
relationship is not affected by the valuation method, even during the inclusion of the self-
regulating factor in the model, and increases the explanatory power. This implies that, with
a 1% increase in the broad money (% of GDP), green patents increase by 0.23%. The effect
is considered significant as the above-mentioned implication would correspond with an
essential contribution to environmental policy and is consistent with the literature [3,41,51].
In addition, there is a negative relation between the interest rate and green innovation.
As interest rates rise, environmentally creative actions decline [20,21]. Using these two
explanatory variables, we find that an expansionary monetary policy is substantially related
to an increase in environmentally innovative actions.
Central bank independence is not highly connected with green innovation, although
central bank transparency is considerably associated. A 1% increase in CBT correlates
with a 0.39% increase in green innovation. We show that transparent methods attract
more resources related to environmental benefits, which is a significant consequence.
In conclusion, the characteristics of central banks influence environmentally innovative
actions [34,35,105].
An increase in economic activity is related to a significant boost in environmentally
friendly innovation. More specifically, a 1% rise in GDP per capita results in an approxi-
mately 1.4% improvement in green patents filed per capita. This conclusion was anticipated
based on previous research [50,56,71,72]. A similar pattern can be seen with government
expenditures [45,74].
In all models, an improved bureaucracy is correlated with a substantial improvement
in green innovation and environmental policy [38,39]. Following the relevant general
literature on natural disasters [3,27,93], the deterioration of winter temperatures is also as-
sociated with a rise in the number of environmental innovations. In conclusion, the overall
model does not correlate strongly with carbon dioxide emissions or green innovation.
Table 3. Regression (PCSE variants and FM–OLS) results.
Dependent Green Innovation (LENVPAT)

Variable 981 Observations 109 Countries
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
Model
FE RE PCSE PCSE (ar1) FM–OLS (5) FM–OLS (7) FM–OLS (10)
0.0007 0.0015 0.0016 *** 0.0013 0.0095 *** 0.0020 *** 0.0023 ***
BRM
(0.754) (0.306) (0.000) (0.130) (0.000) (0.000) (0.002)
−0.0779 *** −0.0644 *** −0.0294 *** −0.0122 −0.0459 *** −0.0560 *** −0.1012 ***
INTRT
(0.010) (0.010) (0.000) (0.584) (0.000) (0.000) (0.000)
0.7354 −0.1396 0.0421 0.0313 * 0.1101 0.0124 0.1303
CBI
(0.164) (0.542) (0.878) (0.052) (0.480) (0.865) (0.214)
0.0081 ** 0.0078 ** 0.0142 *** 0.0047 0.0152 ** 0.0328 *** 0.0257 ***
CBT
(0.025) (0.030) (0.002) (0.148) (0.011) (0.000) (0.000)
0.6467 *** 1.1353 *** 1.2166 *** 1.2006 *** 1.6852 *** 1.3932 ***
LGDP
(0.008) (0.000) (0.000) (0.000) (0.000) (0.000)
0.01413 *** 0.0123 ** 0.0145 *** 0.0078 0.0473 *** 0.0249 ***
GEXP
(0.010) (0.022) (0.000) (0.111) (0.000) (0.002)
0.2023 *** 0.1783 *** 0.0913 ** 0.0662 0.1502 **
BUR
(0.000) (0.001) (0.011) (0.339) (0.011)
−0.0243 −0.0188 * −0.0048 ** −0.0054 * −0.0189 ***
TEMPWIN
(0.150) (0.054) (0.021) (0.099) (0.000)
0.0309 0.0753 *** 0.0612 *** 0.0780 *** 0.01335
CO2EMMS
(0.401) (0.006) (0.000) (0.000) (0.439)
R2 0.4341 0.5984 0.6288 0.4104 0.2088 0.2377 0.3109
*, **, and *** mean the significance level of 10%, 5%, and 1%, respectively; the numbers in parentheses show the
p values. Variables and sources are as same as in Table 1 with the author’s calculations. In FM–OLS, lags 2.00 are
used, and the linear and quadratic eqtrend effect is controlled (2).
4.2.2. Robustness Checks

Econometric Methodologies and Endogeneity
Table 3 presents the models through various econometric methods, which generally
give similar estimators to our main variables. We used fixed and random effects and
error correction methods to deal with the autocorrelation and heteroskedasticity problems
diagnosed in the model. Finally, we used the FM–OLS methodology after identifying
integration and cross-sectoral dependence between the variables due to endogeneity and
omitted variable issues. We performed static tests and found that the directions of the
relations of the key variables of our model variables do not change, even though we used
different static and dynamic econometric methodologies.
Models of Different Variables

In the FM–OLS Models 5, 6, and 7, we applied the gradual completion of our final
model. First, we used one dependent and four independent variables (Model 5). Second,
we added the two variables related to fiscal policy (Model 6), and finally, we introduced
the last three control variables (Model 7). We found stability in the standard variables and
a proportional increase in the completeness and the interpretive power of the models from
20.87% in Model 5 to 23.77% in Model 6 and 31.09% in the model that includes all the
variables of interest.
Alternative Dependent Variable

Table 4 and Model 3 show that each country’s total number of patents (LPAT) act as
the dependent variable. We used the World Bank database for 109 countries. This variable
includes environmental patents and is an indirect indicator of its assessment. We found
that monetary policy and central bank features have a favourable impact on innovation,
validating the findings of the basic model.
Table 4. Distinguishing between low and moderately low-income and high and moderately high-
income countries and alternative innovation proxy analysis with dependent variable LPAT.
981 Observations in 109 Countries (Total)

(LENVPAT) for 35 Low-Mid (LENVPAT) for 74 High-Mid Robustness Analysis with
Dependent
Low-Income Countries (Sample 1) High-Income Countries (Sample 2) Dependent Var LPAT
Models Model 1 Model 2 Model 3
0.018493 0.01420 * 0.002496 ***
BRM
(0.140) (0.085) (0.000)
−0.190777 * −0.055624 −0.021795
INTRT
(0.054) (0.119) (0.061) *
0.837930 * −0.656027 *** 0.177315 **
CBI
(0.099) (0.001) (0.037)
0.023128 0.066645 *** 0.028971 ***
CBT
(0.295) (0.000) (0.000)
0.879847 * 0.173666 1.649686 ***
LGDP
(0.091) (0.465) (0.000)
0.034636 0.033528 0.003866
GEXP
(0.909) (0.130) (0.559)
0.063233 0.350250 *** 0.001975
BUR
(0.857) (0.002) (0.967)
−0.011203 −0.020769 ** −0.030779 ***
TEMPWIN
(0.831) (0.014) (0.000)
0.496369 0.082267 *** 0.014977
CO2EMMS
(0.269) (0.002) (0.285)
R2 0.3723 0.2602 0.3654
Notes: *, **, and *** indicate a significance level of 10%, 5%, and 1%, respectively. The numbers in parentheses
show the p-values. Variables and sources are as same as in Table 1 with the author’s calculations. FM–OLS controls
the linear and quadratic effect of eqtrend (2).
Low- and Medium-Low-Income Countries versus Medium-High and

High-Income Countries
The sample of nations is divided into two categories based on the World Bank’s criteria,
including those with low and relatively low incomes (Sample 1), and those with relatively
high and high incomes (Sample 2). We aim to control the model’s power, variables, and
consistency of the sample using this division and study the effect of monetary policy, central
bank characteristics, and control variables on green innovation in both samples and models.
Table 4 presents the estimators of these models.
The consistency and power of the model were observed. While the relations of the
key variables remained in the same direction, significant differences were noted between
the two models. Broad money, central bank transparency, and control variables, except for
GDP per capita, do not influence green innovation in the first set of countries, as innovation
incentives are limited. They are tasked with addressing more pressing concerns, such as
economic development, the organisation of the state, governance challenges, and possibly a
substantial informal sector. In several countries, the number of problems is so great that en-
vironmental policy represents only a small portion of the total output. Simultaneously, the
authorities have little trust and weak power [36]. Thus, firms and citizens will likely max-
imise their utility without having significant environmental sensitivities. Keeping this in
mind, we argue that the paradigm in these countries must change to adopt green technology.
The countries need strong banking and funding from reliable government institutions [59].
On the contrary, interest rates, central bank independence, and economic growth are crucial
to improving the green economy. These essential development elements inadvertently (and
unintentionally) promote innovation and, by extension, green innovation.
In the second sample group, the impact of monetary expansion policies and central
bank features on green innovation is robust and beneficial. Environmental patents increase
significantly when the money supply rises directly or indirectly through interest rates.
The only “paradoxical” finding is that the independence of central banks hinders green
innovation. In the aftermath of the financial crisis, central banks may use their autonomy
to finance more productive investments for a limited time. There are instances in the
literature where the independence of central banks has little effect on green innovation [41].
In addition, all other variables, such as bureaucracy, climate, and carbon dioxide emissions,
significantly impact green innovation in developed countries.
4.2.3. Heterogeneity Analysis

In this subsection, we are initially interested in dividing our sample into the geograph-
ical regions individually addressed in the literature. The objective is to examine the model’s
heterogeneity and identify any significant differences to include them in policy proposals.
Even though many comparative studies of geographic regions have been conducted up
to this point, the vast majority focus on regions of China, and just a small number focus
on regions throughout the world. This study aims to fill this gap. Based on the previous
general-case analysis, which confirmed the positive causal relationship between monetary
policy and central bank characteristics and green innovation, we are interested in the
potential for expansionary monetary policy to improve green innovation performance in
various geographic regions [59]. In recent decades, for instance, the progress of Asian
developing economies has garnered growing attention due to Asia’s prominent role in
the global economic recovery [41]. Their strategy for transforming the growth route from
an energy-intensive to an environmentally friendly model may significantly impact the
progression of global climate change.
Table 5 displays the correlation of the monetary and central bank characteristics
variables with green innovation in five subsamples. The World Bank’s classification was
proposed to make this division such that the criterion is the region to which the country
belongs. This separation aims to reduce the estimation bias and investigate the essential
factors affecting growth in each region. The first region comprises 40 European and
Central Asian countries, and the second consists of 17 Latin American and Caribbean (LAC)
countries. The third region includes 14 East Asian and Pacific (EAP) nations, the fourth
region consists of 9 Middle Eastern and North African (MENA) countries, and the fifth
region consists of 24 Sub-Saharan and African (SSA) countries. However, no analysis was
conducted in North America and South Asia due to the few countries included in the model.
In general, expansionary monetary policy increases green innovation and strengthens the
model in the LAC and EAP countries. In the SSA countries, the only supporting factor is
the increase in the supply of money, and that is relatively limited, indicating the inherent
deficiencies of the individual countries. Furthermore, expansionary monetary policy and
the characteristics of central banks do not foster green innovation in the MENA countries.
In conclusion, the research confirms that the independence of central banks can have a
negative impact on green innovation in European and some Asian countries.
As a second step, we selected a few variables that were used as controls in the literature,
such as institutional quality [39], energy intensity [67], industry [3], central government
debt [45,46], urbanity [43,44] and economic freedom [42]. Based on these variables, we
divided our sample into low and high groups to determine whether the relationship
between monetary policy, central bank characteristics, and green innovation is affected.
Table 6 presents the results of these analyses. We note that the effect of the dependent
variables is more significant in countries with high institutional quality and industry,
most likely due to their superior transmission mechanisms. The impact of the dependent
variables is considerable in countries with high energy intensity, probably because there is
much space for improvement. While central banks support green innovation in nations
with low debt levels, the effects are inconsistent elsewhere. Due to fewer restrictions,
the dependent variables have a greater impact on green innovation in countries with a
high level of economic freedom. Finally, in our samples, urbanisation did not produce
distinct outcomes.
Table 5. The heterogeneity analysis of monetary policy transmission in five regions according to the
World Bank’s classification; FM–OLS estimation method.
Dep. Var. LENVPAT, 936 Observations in 104 Countries (Total)

Model 1 Model 2 Model 3 Model 4 Model 5
Model
ECA LAC EAP MENA SSA
0.000555 0.014159 *** 0.014692 *** −0.011983 *** 0.004348 ***
BRM
(0.533) (0.000) (0.000) (0.000) (0.000)
−0.2965 ** −0.146979 *** −0.270896 *** −0.057659 *** −0.100880
INTRT
(0.042) (0.000) (0.000) (0.007) (0.178)
−0.627043 *** 0.718503 *** 3.041000 *** −0.465513 *** −0.460603
CBI
(0.002) (0.000) (0.000) (0.000) (0.309)
0.046643 *** 0.064394 *** 0.215479 *** −0.013750 *** 0.021373
CBT
(0.000) (0.000) (0.000) (0.001) (0.133)
R2 0.1430 0.1071 0.1805 0.3987 0.1502
Obs. 360 153 126 81 216
CVs. Yes Yes Yes Yes Yes
** and *** mean the significance level of 5% and 1%, respectively. The numbers in parentheses show the p values.
All abbreviations and sources are the same as in Table 1 with the author’s calculations. In FM–OLS, lags 2.00
are used, and the linear and quadratic eqtrend effect is controlled (2). ECA: Europe and Central Asia, LAC:
Latin America and Caribbean, EAP: East Asia and Pacific, MENA: Middle East and North America, SSA: Sub-
Saharan Africa.
4.2.4. Moderating Effects

The analysis of regional heterogeneity and the effects of our model’s major factors
confirmed the key elements that influence how monetary policy actions affect green in-
novation activities. Additionally, we are concerned with how fiscal, energy, and social
policy factors relate to the monetary policy and central bank characteristics–green inno-
vation nexus. Specifically, we examine the role different types of policies could have in
amplifying or reducing the effect of expansionary monetary policy on environmentally
friendly innovation.
To achieve this aim, we examine the correlation between monetary policy and central
banks in green innovation in light of inflation (a result of monetary policy), population
(a result of social policy), freedom of trade (a result of government policy), and losses
in the distribution of energy (a result of energy policy). Table 7 shows the effect of the
above-mentioned moderating factors on the monetary policy–green innovation nexus.
The expansion of inventive activity necessitates substantial investment. Researchers
claimed that inflation reflects a high level of macroeconomic uncertainty, noting a detri-
mental impact on investment and, subsequently, green investments [106]. It operated as a
control variable in econometric models but had no statistically significant impact [19,45].
According to our analysis, inflation is detrimental to the correlation between expansionary
monetary policy and green innovation, impeding the latter’s advancement.
Population growth positively impacts the quantity of innovative activity [44]. How-
ever, the outcomes are mixed when innovations are measured per capita [3,39,43]. Our
research uses environmental patents per capita as a proxy for green innovation. The effect of
an expansionary monetary policy on green innovation is observed to be constrained by the
presence of the population variable. Possible explanations include the diminishing marginal
ratios as the population increases, and the emerging state of environmental innovation.
Table 6. The effect of monetary policy and central bank characteristics on green innovation in group-
ing base as follows: institutional quality, energy intensity, industry, urbanity, central government
debt, and economic freedom level; FM–OLS estimation method.
Dep. Var. LENVPAT 109 Countries (Total)

Institutional Quality (INSQL) Energy Intensity (ENERINT) Industry (INDUST)
Grouping Base
Low High Low High Low High
0.01485 *** 0.0224 * 0.00233 * 0.01985 *** −0.00283 *** 0.01961 ***
BRM
(0.000) (0.078) (0.076) (0.000) (0.000) (0.000)
−0.059479 *** −0.08763 * −0.01774 −0.06447 *** −0.07013 *** −0.06312 ***
INTRT
(0.003) (0.092) (0.613) (0.001) (0.001) (0.002)
0.80064 *** 0.90084 *** 0.05009 0.40188 *** −0.31368 *** 0.80955 ***
CBI
(0.000) (0.002) (0.783) (0.001) (0.003) (0.000)
0.01398 *** 0.06991 ** 0.03023 ** 0.01423 ** 0.03717 *** 0.00451
CBT
(0.005) (0.030) (0.034) (0.011) (0.000) (0.532)
R2 0.0809 0.1351 0.1472 0.4712 0.2877 0.2455
Obs. 512 467 490 488 468 511
Urban (URBAN) Central Gov. Debt (CGDEBT) Economic Freedom (ECFRD)
Grouping Base
Low High Low High Low High
0.02483 *** 0.00186 ** 0.00036 0.00727 *** 0.015225 0.00054
BRM
(0.000) (0.029) (0.638) (0.002) (0.112) (0.479)
−0.00320 −0.01051 −0.01260 −0.04221 −0.05093 *** −0.08842 ***
INTRT
(0.918) (0.680) (0.638) (0.137) (0.008) (0.010)
0.63183 *** 0.25735 * 0.39004 *** −0.17361 0.63599 *** 0.95878 ***
CBI
(0.000) (0.069) (0.003) (0.339) (0.000) (0.000)
0.01386 ** 0.00771 0.01308 ** 0.01690 * 0.01398 *** 0.04210 **
CBT
(0.049) (0.458) (0.033) (0.071) (0.007) (0.030)
R2 0.1188 0.0877 0.1896 0.1589 0.3574 0.1836
Obs. 494 484 453 525 551 426
CVs. Yes Yes Yes Yes Yes Yes
*, **, and *** mean the significance level of 10%, 5%, and 1%, respectively. The numbers in parentheses show the
p values. All abbreviations and sources are the same as in Table 1 with the author’s calculations. In FM–OLS, lags
1.00 are used, and the linear and quadratic eqtrend effect is controlled (2).
Table 7. The moderating effects of the inflation, population, trade openness, and energy loss channels;
FM–OLS estimation method.

Model Model 1 Model 2 Model 3 Model 4
0.003939 *** 0.006792 *** 0.016645 *** 0.005982 ***
BRM
(0.004) (0.000) (0.000) (0.000)
−0.138968 *** −0.064365 *** −0.090848 *** −0.117240 ***
INTRT
(0.000) (0.000) (0.000) (0.000)
0.099907 0.126616 0.209241 *** 0.085753
CBI
(0.564) (0.125) (0.000) (0.493)
0.037457 *** 0.006311 0.043332 *** 0.039971 ***
CBT
(0.000) (0.203) (0.000) (0.000)
−0.002335 ***
BRM×INFL
(0.000)
−0.002924 ***
BRM×POP
(0.000)
−0.000040 ***
BRM×TROP
(0.000)
Table 7. Cont.

Model Model 1 Model 2 Model 3 Model 4
0.000575 ***
BRM×ENRGLOS
(0.000)
R2 0.2708 0.3489 0.2285 0.2325
Control Variables Yes Yes Yes Yes
*** means the significance level of 1%. The numbers in parentheses show the p values. All abbreviations and
sources are the same as in Table 1 with the author’s calculations. In FM–OLS, lags 2.00 are used, and the linear
and quadratic eqtrend effect is controlled (2).
The impact of trade openness on green innovation has been extensively studied in
the academic literature. A largely positive correlation was found [3,41]. However, a
negative correlation cannot be ruled out, mainly when carbon dioxide gas emissions are
utilised as an intermediate variable [40,107]. According to our research, increasing trade
openness limits the impact of expansionary monetary policy on green innovation. One
argument for this outcome is that nations actively seek foreign investment in the years
following a crisis. With the help of domestic financing and their already-registered patents,
foreign companies are drawn to the country due to trade liberalisation. They partially
implement the expansionary monetary policy in this way while limiting the growth of new
green patents. Finally, the role of energy losses as a moderating factor for the impact of
expansionary monetary policy on environmental innovation has received less attention. We
observe that energy losses positively impact the effect previously mentioned. Innovative
methods are needed to reduce energy losses; thus, following the current tendency, outdated
methods are being replaced with more advanced, effective ones.
5. Conclusions and Policy Implications

The current study examines the effects of monetary policy factors and central bank
characteristics on green innovation and transitioning to a low-carbon economy. Addition-
ally, it examines international and regional differences in monetary policy and the green
innovation nexus and analyses these differences by selected determinants of a green econ-
omy. First, the empirical data from 109 countries during the period of 2010–2018 reveals
that an expansionary monetary policy action, either by expanding the money supply or by
lowering the real interest rate, considerably boosts green innovation [20,21,41,51]. More-
over, we demonstrated that the characteristics of central banks, mainly their transparency,
promote green growth [34,35]. In addition, institutional factors were included in our model
alongside energy, fiscal, and other macroeconomic factors. We showed that a rise in per
capita GDP, government spending, and improvement in bureaucracy all promote green
economic activity. Increasing carbon dioxide emissions and energy losses are also essential
factors in developing more sustainable technologies.
We utilised numerous static and dynamic econometric methods. However, our basic
PCSE (ar1) and FM–OLS were employed to alleviate cross-sectoral dependence issues caused
by endogeneity and omitted variable problems. According to the literature [97,99,101–103],
these techniques are most effective when several countries are expected to exhibit strong
similarities. Afterwards, we conducted two subgroup heterogeneity analyses, initially
between developing and developed economies. First, we found that interest rates, the inde-
pendence of the central bank, and economic growth significantly affect green innovation in
developing nations. Particularly in developed countries, expansionary monetary policy,
central bank transparency, and energy variables promote green growth. Second, we con-
ducted a regional analysis and found that expansionary monetary policy promotes green
innovation in countries in the LAC and EAP regions. However, among the countries of
Sub-Saharan Africa, the only supporting element is the increase in money supply, revealing
the fundamental limitations of each country. In addition, expansionary monetary policy
and central bank features do not support green innovation in MENA nations.
Moreover, using differentiating factors in the sample of countries, we showed that

the influence of expansionary monetary policy on green innovation is more pronounced
in countries with high institutional quality, industrial concentration, and energy intensity.
Finally, by employing interaction term analysis, we analysed the impact that inflation,
population, trade openness, and energy losses have as moderating effects of an expansion-
ary monetary policy on green innovation. We found the significance of the first three as
deterrents and the fourth as a multiplier.
5.1. Policy Recommendations

Our research, particularly the analysis of the dynamic behaviour of the monetary
policy–green innovation nexus, provides additional evidence for the non-neutrality of
monetary policy actions. It provides information indicating that the change in the money
supply and central bank characteristics should be viewed as something other than typical
processes for resolving financial crises because it has a lasting effect on economic activities.
Using the outcomes of our research’s empirical analysis, we provide several policy recom-
mendations for economies targeting green growth. First, expansionary monetary policy
acts, such as expanding the money supply or lowering the real interest rate, can reduce
the risk premium and raise macroeconomic expectations. This could increase the flow of
capital into businesses involved in green innovation, thereby boosting their performance
in this area. This dynamic is particularly prominent in LAC and EAP countries, which
stand to earn more from monetary expansion policies and better central bank features.
Additionally, we have shown that inflation is a deterrent in the transmission process of
monetary expansion to green innovation; therefore, this monetary development must be
carried out cautiously.
Second, there should be more transparency regarding central banks, particularly in
industrialised nations where it appears they must actively contribute to sustainable devel-
opment. This will help promote green innovation activities that an expansionary monetary
policy will have on them. Third, the fiscal environment needs to be improved, particularly
in developing countries. Nonetheless, developed nations must also reduce bureaucracy
issues because it helps direct the additional purchasing power that an expansionary mon-
etary policy brings towards green innovation initiatives. Fourth, SSA nations must pay
more attention to infrastructure, environmental laws, and fiscal expansion for monetary
expansion to generate green growth. In the MENA region, neither monetary development
nor greater independence and transparency of central banks contributed to green growth
during the period under consideration.
Fifth, institutions must be optimised, and rigorous environmental regulation helps
direct the additional real purchasing power brought about by an expansionary monetary
policy into green innovation activities. In addition, the regulation’s legality requires robust
institutions with corresponding enforcement capacity. Most countries with stricter envi-
ronmental legislation can implement them, but introducing more stringent environmental
regulations in developing nations does not necessarily result in their enforcement. In
addition, lagging regions require additional development and industrialisation incentives
to reach a higher rate of green growth due to expansionary monetary policy. Moreover,
greater efforts must be made to simplify transactions. Finally, our research’s moderating
analysis concludes that import and export incentives must be administered cautiously, as
trade openness is a barrier to the diffusion of monetary expansions for green innovation.
Inflation experiences a similar phenomenon, and expenditures are needed to update the
energy products’ manufacturing, transportation, and distribution networks—a move that
appears to promote green growth.
5.2. Limitations and Future Directions

The current study is undoubtedly subject to some limitations. For a more appropriate
robustness test, we may use more specialised green innovation indicators, such as the
percentage of environment-related technologies or environmentally related government
R&D budget as a percentage of total government R&D—variables that are currently ex-
clusively computed for OECD nations. Furthermore, what impact will energy product
prices have on green innovation? Additionally, we can conduct empirical research on the
factors that influence how monetary policy impacts green innovation, including public debt,
bond yields, reserve funds, and others. The frameworks put forth in this paper pave the
way for further investigation and the implementation of climate-related financial stability
policies. Additionally, empirical research has the potential to expand the scope of policy
considerations towards central bank governance models that prioritize coordination among
various policy wings. It is also possible to research which financial stability governance
model produces climate-related policies that are more successful. Finally, this study’s
data collection period is 2010–2018, which may be extended backwards to draw long-term
conclusions and make the econometric causality control techniques more reliable (with
more time inertia).
Funding: This research received no external funding.

Institutional Review Board Statement: Not applicable.
Informed Consent Statement: Not applicable.
Data Availability Statement: All data used in this study are publicly available and mentioned in
the paper.
Acknowledgments: The author is very grateful to three anonymous reviewers and the journal’s
editorial team for providing constructive comments to enhance the quality of this paper.
Conflicts of Interest: The author declares no conflict of interest.
Appendix A. The 109 Countries Used in the Model

Albania, Angola, Argentina, Armenia, Australia, Austria, Azerbaijan, Belarus, Bel-
gium, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Burkina Faso, Burundi,
Cambodia, Canada, Cape Verde, Chad, Chile, China, Colombia, Democratic Republic of
Congo, Costa Rica, Côte d’Ivoire, Croatia, Cyprus, Czech Republic, Denmark, Ecuador,
Egypt, El Salvador, Estonia, Ethiopia, Finland, France, Gabon, The Gambia, Georgia,
Germany, Ghana, Greece, Guatemala, Honduras, Hong Kong, Hungary, Iceland, India,
Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea, Kyr-
gyz Republic, Lao PDR, Latvia, Lesotho, Lithuania, Luxembourg, Madagascar, Malawi,
Malaysia, Mali, Malta, Mauritania, Mauritius, Mexico, Moldova, Mongolia, Montenegro,
Morocco, Mozambique, Namibia, Nepal, Netherlands, New Zealand, Nicaragua, Nigeria,
North Macedonia, Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portu-
gal, Qatar, Romania, Russian Federation, Rwanda, Senegal, Serbia, Seychelles, Singapore,
Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, St. Vincent and the Grenadines,
Sudan, Swaziland, Sweden, Switzerland, Tajikistan, Tanzania, Thailand, Togo, Trinidad
and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Kingdom, United
States, Uruguay, Uzbekistan, Venezuela RB, Vietnam, Zambia, Zimbabwe.
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sustainability

Department of Economics, Democritus University of Thrace, 69100 Komotini, Greece; espyromi@econ.duth.gr

Sustainability 2023, 15, 7907. https://doi.org/10.3390/su15107907 https://www.mdpi.com/journal/sustainability

2.1. Monetary Policy Factors

2.2. Energy Policy Factors

2.3. Other Main Macroeconomic and Institutional Factors

3. Data and Methodology

Table 1. Descriptive statistics (981 observations, 109 countries).

Variables Disambiguation Source Min. Max. Mean St. Dev.

3.1.2. Dependent Variable

3.1.3. Explanatory Variables

3.1.4. Control Variables

3.1.5. Data Quality

4. Results and Discussion

4.1.2. Cross-Sectional Dependence (CSD) and Panel Cointegration Results

Table 2. Unit root test results.

Variables LLC BREITUNG ADF–FISHER

4.2. Empirical Results and Discussion

Table 3. Regression (PCSE variants and FM–OLS) results.

Dependent Green Innovation (LENVPAT)

4.2.2. Robustness Checks

Models of Different Variables

Alternative Dependent Variable

981 Observations in 109 Countries (Total)

Low- and Medium-Low-Income Countries versus Medium-High and

4.2.3. Heterogeneity Analysis

Dep. Var. LENVPAT, 936 Observations in 104 Countries (Total)

4.2.4. Moderating Effects

Dep. Var. LENVPAT 109 Countries (Total)

Dep. Var. LENVPAT, 981 Observations in 109 Countries (Total)

Dep. Var. LENVPAT, 981 Observations in 109 Countries (Total)

5. Conclusions and Policy Implications

Moreover, using differentiating factors in the sample of countries, we showed that

5.1. Policy Recommendations

5.2. Limitations and Future Directions

Funding: This research received no external funding.

Appendix A. The 109 Countries Used in the Model

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