A Financial Macro-Network Approach to Climate Policy Evaluation

57 Pages Posted: 21 Nov 2017 Last revised: 18 Apr 2018

See all articles by Veronika Stolbova

Veronika Stolbova

University of Zurich, Department of Banking and Finance

Irene Monasterolo

Utrecht University

Stefano Battiston

University of Zurich - Department Finance; Ca Foscari University of Venice

Date Written: April 6, 2018

Abstract

Existing approaches to assess the economic impact of climate policies tend to overlook the financial sector and to focus only on direct effects of policies on the specific institutional sector they target, neglecting possible feedbacks between sectors, thus, underestimating the overall policy effect. To fill in this gap, we develop a methodology based on financial networks, which allows for analyzing the transmission throughout the economy of positive or negative shocks induced by the introduction of specific climate policies. We apply the methodology to empirical data of the Euro Area to identify the feedback loops between the financial sector and the real economy both through direct and indirect chains of financial exposures across multiple financial instruments. By focusing on climate policy-induced shocks that affect directly either the banking sector or non-financial firms, we analyze the reinforcing feedback loops that could amplify the effects of shocks on the financial sector and then cascade on the real economy. Our analysis helps to understand the conditions for virtuous or vicious cycles to arise in the climate-finance nexus and to provide a comprehensive assessment of the economic impact of climate policies.

Keywords: financial networks, feedback loops, climate policies, shock transmission channels, indirect effects, low-carbon transition

JEL Classification: B40, C00, E61, G20

Suggested Citation

Stolbova, Veronika and Monasterolo, Irene and Battiston, Stefano, A Financial Macro-Network Approach to Climate Policy Evaluation (April 6, 2018). Available at SSRN: https://ssrn.com/abstract=3073191 or http://dx.doi.org/10.2139/ssrn.3073191

Veronika Stolbova (Contact Author)

University of Zurich, Department of Banking and Finance ( email )

Andreastrasse 15
Zurich, 8050
Switzerland
+41 44 635 21 03 (Phone)

HOME PAGE: http://www.bf.uzh.ch/cms/en/stolbova.veronika.html

Irene Monasterolo

Utrecht University ( email )

Vredenburg 138
Utrecht, 3511 BG
Netherlands

Stefano Battiston

University of Zurich - Department Finance ( email )

Plattenstrasse 32
Zürich, 8032
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

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