The Environmental Kuznets Curve: A Semiparametric Approachwith Cross-Sectional Dependence

Abstract

This paper proposes a new approach to examine the relationship between CO2 emissionsand economic developing. In particular, we propose to test the Environmental Kuznets Curve(EKC) hypothesis for a panel of24OECD countries and32non-OECD countries by developinga more flexible estimation technique which enables to account for functional form misspecification, cross-sectional dependence, and heterogeneous relationships among variables, simultaneously. We propose a new nonparametric estimator that extends the well-known Common CorrelatedEffect (CCE) approach from a fully parametric framework to a semiparametric panel data model. Our results corroborates that the nature and validity of the income-pollution relationship basedon the EKC hypothesis depends on the model assumptions about the functional form specification. For all the countries analyzed, the proposed semiparametric estimator leads to non-monotonicallyincreasing or decreasing relationships for CO2emissions, depending on the level of economicdevelopment of the country.