No. 933: Demand or Supply? An empirical exploration of the effects of climate change on the macroeconomy

Matteo Ciccarelli European Central Bank Fulvia Marotta Queen Mary University of London

December 7, 2021

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Abstract

Using a panel of 24 OECD countries for the sample 1990-2019 and a standard macroeconomic framework, the paper tests the combined macroeconomic effects of climate change, environmental policies and technology. Overall, we find evidence of significant macroeconomic effects over the business cycle: physical risks act as negative demand shocks while transition risks as downward supply movements. The disruptive effects on the economy are exacerbated for countries without carbon tax or with a high exposure to natural disasters. In general, results support the need for a uniform policy mix to counteract climate change with a balance between demand-pull and technology-push policies.

J.E.L classification codes: C11, C33, E32, E58, Q5

Keywords: Environmental policy, Environment-related technologies, Physical risks, Business cycle, SVAR