Climate Minsky moments and endogenous financial crises

Matthias Kaldorf and Matthias Rottner

No 1248, BIS Working Papers from Bank for International Settlements

Abstract: How does a shift in climate policy affect financial stability? We develop a quantitative macroeconomic model with carbon taxes and endogenous financial crises to study so-called "Climate Minsky Moments". By reducing asset returns, an accelerated transition to net zero initially elevates the crisis probability substantially. However, carbon taxes enhance long-run financial stability by diminishing the relative size of the financial sector. Quantitatively, the net financial stability effect is only negative for higher social discount rates. Even then, the welfare effects of "Climate Minsky Moments" are, at most, second-order relative to the real costs and benefits of an accelerated transition.

Keywords: climate policy; financial stability; financial crises; transition risk; non-linearities (search for similar items in EconPapers)
JEL-codes: E32 E44 G20 Q52 Q58 (search for similar items in EconPapers)
Date: 2025-03
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