Assessing the dynamic nexus between international trade, foreign direct investment, economic growth, and climate change within the EKC framework

Abstract

This study explores the dynamic relationship between trade, foreign direct investment (FDI), population growth, carbon emissions, exchange rates, and economic growth for Ghana from 1990 to 2020 using the annual frequency. The study employs the autoregressive distributed lag (ARDL) model, augmented with variance decomposition, impulse response, and causality tests to estimate both the short-run and long-run effects of the variables. The empirical results shows that FDI and CO₂ emissions have a positive long-run impact on economic growth, while exchange rate volatility and trade openness have a negative short-run impact on economic growth. The term for the error correction confirmed the presence of a stable equilibrium in the long run. Furthermore, the results show that the economic growth of Ghana remains associated with a higher environmental pollution, reflecting the first phase of the environmental Kuznets curve (EKC) hypothesis. The growth in population has marginal but persistent impacts from the impulse response models, showing that the population pressure without productivity increases in the short term. Additionally, the model converges at eight to ten periods, a result which shows that the economy adjusts to exogenous shocks, and returns to the long-run equilibrium as time progresses. Policy suggestions also incline towards further promoting green investment channels, environmental regulations, and adjusting trade and FDI policies in order to promote sustainable development.