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Climate Minsky Moments and endogenous financial crises

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  • Kaldorf, Matthias
  • Rottner, Matthias

Abstract

Does a shift to ambitious climate policy increase financial fragility? In this paper, we develop a quantitative macroeconomic model with carbon taxes and endogenous financial crises to study such "Climate Minsky Moments". By reducing asset returns, an accelerated transition to net zero exerts deleveraging pressure on the financial sector, initially elevating the financial crisis probability substantially. However, carbon taxes improve long-run financial stability since permanently lower asset returns reduce the buildup of excessive leverage. Quantitatively, we find that the net financial stability effect of ambitious climate policy is positive for low but empirically plausible social discount rates.

Suggested Citation

  • Kaldorf, Matthias & Rottner, Matthias, 2024. "Climate Minsky Moments and endogenous financial crises," Discussion Papers 26/2024, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:300701
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    References listed on IDEAS

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    1. Garth Heutel, 2012. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 244-264, April.
    2. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
    3. Alexander Richter & Nathaniel Throckmorton & Todd Walker, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Computational Economics, Springer;Society for Computational Economics, vol. 44(4), pages 445-476, December.
    4. Diluiso, Francesca & Annicchiarico, Barbara & Kalkuhl, Matthias & Minx, Jan C., 2021. "Climate actions and macro-financial stability: The role of central banks," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    5. Manuel Amador & Javier Bianchi, 2024. "Bank Runs, Fragility, and Credit Easing," American Economic Review, American Economic Association, vol. 114(7), pages 2073-2110, July.
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    Cited by:

    1. Lukman A. Lasisi & Franklin N. Ngwu & Mohammed K. Taliat & Abeeb O. Olaniran & Kelechi C. Nnamdi, 2025. "Modelling commodity market volatility with climate policy uncertainty: a GARCH-MIDAS approach," SN Business & Economics, Springer, vol. 5(3), pages 1-21, March.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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