Demand or Supply? An empirical exploration of theeffects of climate change on the macroeconomy

Using an original panel data set for 24 OECD countries over the sample 1990-2019 and a standard empirical macroeconomic framework for business cycle analysis, the paper tests the combined macroeconomic effects of climate change, environmental related 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 that did not adopt a carbon tax or with a high exposure to natural disasters. In general, we find evidence that green technological development that is not supported by the right policy mix may result in market failures that have different sizes for different countries with heterogeneous consequences on the phases and duration of their respective  cycles. A  coordinated  approach  on  climate  policies  would  therefore  be  essential for instance in a monetary union with common monetary and financial objectives.