Carbon, Green Growth, and Renewable Energy in the Stability Nexus: The Conditional Role of Institutional Quality in a Fourier-ARDL Framework

This article explores the determinants of financial stability over the period 1995–2024 by examining the roles of financial inclusion, institutional quality, carbon emissions, green growth, and renewable energy. Financial inclusion is measured through a composite index constructed from bank-based indicators using Principal Component Analysis (PCA). The empirical strategy involves two models. The first applies the Autoregressive Distributed Lag (ARDL) framework to investigate the short- and long-run dynamics, while the second introduces an interaction between financial inclusion and institutional quality to capture their joint effects. To address potential structural breaks, the Fourier-ARDL approach is employed by incorporating smooth sine and cosine terms. The results confirm long-run cointegration in both models. Financial inclusion consistently enhances financial stability in the long run, and its positive impact is amplified when supported by strong institutional quality. Conversely, green growth, institutional quality, and renewable energy display negative coefficients in the long run, suggesting that adjustment costs and reform processes may weaken their contribution to stability. The initially positive effect of carbon emissions diminishes under the Fourier specification, pointing to instability in this relationship. Policy implications highlight the importance of coordinating inclusiveness and institutional reforms, promoting green transformation through risk-sharing financing, and using crisis-sensitive indicators to monitor stability. This study contributes to sustainable finance literature through three key innovations. First, it develops a comprehensive financial inclusion using PCA to overcome the limitations of single-indicator measures. Second, it empirically tests the conditional role of institutional quality by incorporating an interaction term, demonstrating that strong institutions are essential for amplifying financial stability. Third, it employs a Fourier-ARDL framework to handle structural breaks without pre-determining their dates, ensuring more reliable long-run estimates by capturing smooth regime shifts over the 1995–2024 period.