The Macroeconomic Effects of Climate Policy Uncertainty

Authors:

Konstantinos Gavriilidis, University of Stirling
Diego R. Känzig, Northwestern University
Ramya Raghavan, Northwestern University
James H. Stock, Harvard University

Abstract:

We develop a novel measure of climate policy uncertainty based on newspaper coverage. Our index spikes during key U.S. climate policy events—including presidential announcements on international agreements, congressional debates, and regulatory disputes—and shows a recent upward trend. Using an instrument for plausibly exogenous uncertainty shifts, we find that higher climate policy uncertainty decreases output and emissions while raising commodity and consumer prices, acting as supply rather than demand shocks. Faced with this trade-off, monetary policy does not accommodate climate policy uncertainty shocks, shaping their transmission. Firm-level analyses show stronger declines in investment and R&D when firms have higher climate change exposure.