Governance, Democracy, and the Effectiveness of Economic Policies in Green Finance

Document Type : Research Paper

Authors

1 Faculty of Economics and Social Sciences, Shahid Chamran University of Ahvaz, Ahvaz, Iran and visiting scholar at the Faculty of Business, Athabasca University, Edmonton, Canada.

2 Department of Economics, Arak University, Arak, Iran.

3 Department of Economics, Vali-e-Asr University of Rafsanjan, Rafsanjan, Iran.

Abstract

Governance quality and democracy are important pillars of sustainable green finance. The establishment of transparent legal frameworks, effective anti-corruption controls, and improved regulatory quality are essential to increase investor confidence in green financial markets. This study seeks to evaluate the role of institutional quality and democracy in the effectiveness of economic policies related to green finance from 2006 to 2023. Using Driscoll–Kraay standard error regressions, Westerlund and Kao cointegration tests, the GMM estimator, and the JKS Granger non‑causality test, the results show that democracy and governance quality have positive and significant effects on green investment development across high‑, middle‑, and low‑income countries. The presence of democratic institutions and transparent governance enhances the efficiency of macroeconomic policies in promoting renewable‑energy expansion. The effect of fiscal policies is positive and significant in high-income countries, while in lower-income countries, institutional weakness and corruption weaken this effect. In addition, combining monetary and fiscal policies with high-quality institutions generates a synergistic effect on green financial growth. Our findings reveal that the success of economic policies in advancing environmental goals depends on the institutional and democratic structure of countries. The study recommends aligning macroeconomic policies with environmental objectives and integrating sustainability criteria into fiscal and monetary policy frameworks, particularly within central banks and finance ministries.

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History

  • Receive Date: 13 January 2026
  • Revise Date: 27 June 2026
  • Accept Date: 27 June 2026

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