Climate Policy, Financial Frictions, and Transition Risk

Stefano Carattini, Garth Heutel and Givi Melkadze

Review of Economic Dynamics, 2023, vol. 51, 778-794

Abstract: We study climate and macroprudential policies in an economy with financial frictions. Using a dynamic stochastic general equilibrium model featuring both a pollution market failure and a market failure in the financial sector, we explore transition risk – whether ambitious climate policy can lead to macroeconomic instability. It can, but the risk can be alleviated through macroprudential policies – taxes or subsidies on banks' assets. Then, we explore efficient climate and macroprudential policy in the long run and over business cycles. The presence of financial frictions affects the steady-state value and dynamic properties of the efficient carbon tax. (Copyright: Elsevier)

Keywords: Carbon taxes; Business cycles; Financial frictions; Stranded assets; Transition risk; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E32 G18 Q58 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (19)

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DOI: 10.1016/j.red.2023.08.003

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