Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282539 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10851
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Ambitious climate policy, coupled with financial frictions, has the potential to create macrofinancial stability risk. Such stability risk may expand beyond the economy implementing climate policy, potentially catching other countries off guard. International spillovers may occur because of trade and financial channels. Hence, we study the design and effects of climate policies in the world economy with international trade and financial flows. We develop a two-sector, two-country, dynamic general equilibrium model with financial frictions, climate policies, including carbon tariffs, and macroprudential policies. Using the calibrated model, we evaluate spillovers from unilateral domestic carbon pricing to foreign economies and back. We also examine more ambitious climate architectures involving carbon tariffs or a global carbon price. We find that accounting for cross-border financial flows and frictions in credit markets is crucial to understand the effects of climate policies and to guide the implementation of macroprudential policies at the global scale aimed at minimizing transition risk and paving the way for ambitious climate policy.
Subjects: 
financial frictions
carbon tax
carbon tariffs
open economy
JEL: 
E44
E58
F38
F42
G18
Q58
Document Type: 
Working Paper
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