Climate Policy, Financial Frictions, and Transition Risk

Stefano Carattini, Garth Heutel and Givi Melkadze

No 28525, NBER Working Papers from National Bureau of Economic Research, Inc

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. Macroprudential policy alone, without a carbon tax, is not very effective at addressing the pollution externality.

JEL-codes: E32 G18 Q58 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-fdg and nep-mac
Note: EEE
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Citations: View citations in EconPapers (25)

Published as Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate policy, financial frictions, and transition risk," Review of Economic Dynamics, .

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Journal Article: Climate Policy, Financial Frictions, and Transition Risk (2023)
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