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Climate Policy, Financial Frictions, and Transition Risk

Author

Listed:
  • Stefano Carattini

    (Georgia State University)

  • Garth Heutel

    (Georgia State University)

  • Givi Melkadze

    (Georgia State University)

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)

Suggested Citation

  • Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
    • Handle: RePEc:red:issued:22-114
    DOI: 10.1016/j.red.2023.08.003
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    More about this item

    Keywords

    Carbon taxes; Business cycles; Financial frictions; Stranded assets; Transition risk; Macroprudential policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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