Work

Climate policy uncertainty and macroeconomic dynamics: Financial amplification and state-dependent effects

Year: 2026

Type: article

Abstract: Climate policy uncertainty (CPU) poses growing risks to macroeconomic stability, yet its transmission mechanisms remain understood. While the literature has examined general uncertainty, the state-dependent effects of transition risk through the financial system are underexplored. Using U.S. local projections and a two-sector New Keynesian model, this paper examines how CPU shocks propagate across the business cycle. I find that CPU shocks significantly contract investment and credit during economic expansions, whereas their effects are statistically muted during recessions. These dynamics are driven by a brown collateral channel, where uncertainty about the future value of carbon-intensive assets triggers a financial accelerator mechanism. The findings highlight that transition risk operates as a systemic financial shock, suggesting that macro-prudential frameworks must account for the volatility of brown asset valuations.

Source: Economic Modelling

DOI: 10.1016/j.econmod.2026.107523

Author: Facundo Luna Mallea

Institution: Rutgers, The State University of New Jersey

Language: English

Topic: Market Dynamics and Volatility

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: hybrid

Estimated APC paid: $3,660