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Demand or supply? An empirical exploration of the effects of climate change on the macroeconomy

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  • Ciccarelli, Matteo
  • Marotta, Fulvia

Abstract

The macroeconomic effects of climate-related events and climate policies depend on the interaction between demand- and supply-type of shocks that those events and policies imply. Using a panel of 24 OECD countries for the sample 1990-2019 and a standard macroeconomic framework, the paper tests the combined effect of (1) climate change, (2) environmental policies and (3) environment-related technologies on the macroeconomy. Results show that climate change and policies to counteract them have a significant, albeit not sizeable, macroeconomic effects over the business cycle. We find evidence that physical risks work as negative demand shocks while transition policies or technology improvements resemble downward supply movements. Furthermore, the disruptive effects on the economy are exacerbated for countries without carbon tax or with a high exposure to natural disasters. Overall our results support the need for a uniform policy mix to counteract climate change with a balance between demand-pull and technology-push policies. JEL Classification: C11, C33, E32, E58, Q5

Suggested Citation

  • Ciccarelli, Matteo & Marotta, Fulvia, 2021. "Demand or supply? An empirical exploration of the effects of climate change on the macroeconomy," Working Paper Series 2608, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20212608
    Note: 224580
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    Cited by:

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    2. Patrick Gruning, 2022. "Fiscal, Environmental, and Bank Regulation Policies in a Small Open Economy for the Green Transition," Working Papers 2022/06, Latvijas Banka.
    3. Alessandro Ferrari & Valerio Nispi Landi, 2022. "Will the green transition be inflationary? Expectations matter," Questioni di Economia e Finanza (Occasional Papers) 686, Bank of Italy, Economic Research and International Relations Area.
    4. Piergiorgio Alessandri & Haroon Mumtaz, 2021. "The Macroeconomic Cost of Climate Volatility," Working Papers 928, Queen Mary University of London, School of Economics and Finance.
    5. Heinisch, Katja & Holtemöller, Oliver & Schult, Christoph, 2023. "Stellungnahme "Übergreifende Kostenbetrachtung der Auswirkungen des Klimawandels in Schleswig-Holstein"," IWH Policy Notes 1/2023, Halle Institute for Economic Research (IWH).
    6. In, Soh Young & Manav, Berk & Venereau, Clothilde M.A. & Cruz R., Luis Enrique & Weyant, John P., 2022. "Climate-related financial risk assessment on energy infrastructure investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 167(C).
    7. Banning, Maximilian & Großmann, Anett & Heinisch, Katja & Hohmann, Frank & Lutz, Christian & Schult, Christoph, 2023. "Evidence-based support for adaptation policies in emerging economies," IWH Studies 2/2023, Halle Institute for Economic Research (IWH).
    8. Marco Del Negro & Julian di Giovanni & Keshav Dogra, 2023. "Is the Green Transition Inflationary?," Liberty Street Economics 20230214, Federal Reserve Bank of New York.
    9. Matteo Ciccarelli & Fulvia Marotta, 2021. "Demand or Supply? An empirical exploration of the effects of climate change on the macroeconomy," Working Papers 933, Queen Mary University of London, School of Economics and Finance.
    10. Faccia, Donata & Parker, Miles & Stracca, Livio, 2021. "Feeling the heat: extreme temperatures and price stability," Working Paper Series 2626, European Central Bank.

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    More about this item

    Keywords

    business cycle; environment-related technologies; environmental policy; physical risks; SVAR;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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