Green Financial Development, Green Innovation, and Resource Productivity: Static and Dynamic Evidence from the European Union

This study examines the relationship between green financial development, green innovation, and resource productivity in 27 European Union member states over the period 2000–2020. To capture green financial development more comprehensively, the study develops a composite indicator combining financial development and environmental taxation. The empirical analysis employs two-way fixed-effects estimations, bootstrap mediation analysis, lagged fixed-effects models, decomposition robustness tests, and dynamic System GMM estimations to investigate both the direct and indirect channels linking green finance to circular economy performance. The results show that green financial development consistently promotes green innovation across the baseline and robustness specifications. However, the bootstrap mediation analysis does not provide statistically robust evidence that green innovation mediates the relationship between green financial development and resource productivity within the static framework. The dynamic System GMM estimations provide additional evidence by indicating a positive association between green innovation and resource productivity once persistence in the dependent variable is taken into account. These findings suggest that the relationship among green financial development, green innovation, and resource productivity is sensitive to the econometric framework employed and is better characterized as a dynamic adjustment process rather than an immediate contemporaneous transmission mechanism. Heterogeneity analysis further reveals that these relationships are primarily evident among Western EU member states, whereas comparable associations are not statistically supported in the Eastern EU subsample, highlighting the importance of differentiated policy approaches across the European Union. This study contributes to the literature in four main ways. First, it proposes a composite Green Financial Development indicator. Second, it evaluates Resource Productivity as an indicator of circular economy performance. Third, it demonstrates that static and dynamic panel approaches provide complementary evidence on the green finance–innovation–productivity nexus. Fourth, it reveals substantial regional heterogeneity within the European Union by showing that the estimated relationships are statistically significant in the Western EU subsample but not in the Eastern EU subsample, underscoring the importance of differentiated regional policy approaches. The findings offer important implications for policymakers seeking to accelerate the transition toward a more resource-efficient and sustainable European economy.