Climate Policy, Financial Frictions, and Transition Risk

60 Pages Posted: 8 Mar 2021 Last revised: 4 Sep 2023

See all articles by Stefano Carattini

Stefano Carattini

Georgia State University

Garth Heutel

Georgia State University

Givi Melkadze

Georgia State University - Department of Economics

Date Written: March 2021

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.

Suggested Citation

Carattini, Stefano and Heutel, Garth and Melkadze, Givi, Climate Policy, Financial Frictions, and Transition Risk (March 2021). NBER Working Paper No. w28525, Available at SSRN: https://ssrn.com/abstract=3799816

Stefano Carattini (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Garth Heutel

Georgia State University ( email )

Givi Melkadze

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

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