Bank of Lithuania
5118_f61ff4343c42f6f44187a8107192d441.png
2019-12-27

No 18. Michael Donadelli, Patrick Grüning, Steffen Hitzemann. Understanding macro and asset price dynamics during the climate transition

5118_f61ff4343c42f6f44187a8107192d441.png
0

This paper analyzes the transition to a low-carbon economy and its effects on macroeconomic quantities and asset prices. Empirically, we document that the relative valuation of fossil fuel firms has significantly declined with the rise of climate change risk awareness. We develop a macro asset pricing model for the climate transition that matches this empirical fact and allows us to characterize the dynamics of macroeconomic aggregates and asset prices during and after the transition. In particular, we analyze (i) firm valuation dynamics, (ii) climate policy risk premia, (iii) capital reallocation between sectors, and (iv) the behavior of oil prices.

JEL Codes: E2, E3, G12, Q43.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Michael Donadelli, Patrick Grüning, Steffen Hitzemann, Climate change, Policy risk, general equilibrium, Risk premia, Oil market