Olena Havrylchyk (University of Paris 1 Panthéon-Sorbonne) - Firms’ Carbon Emissions and Monetary Policy

BOFIT-seminaarit

BOFIT Seminar - Olena Havrylchyk (University of Paris 1 Panthéon-Sorbonne) - Firms’ Carbon Emissions and Monetary Policy

Co-author: Pedram Pourabbasvafa (University of Paris 1 Panthéon-Sorbonne)

Firms’ Carbon Emissions and Monetary Policy

Abstract
This paper examines the role of carbon bias in the transmission of monetary policy shocks in the U.S. and euro area between 2005 and 2022. We employ an event-study design and Jorda's (2005) local projections to estimate the effects on stock prices and firm investment, respectively. In regressions excluding firm-and industry-level controls, we find that carbon emissions intensity strengthens monetary policy transmission in the U.S., but not in the euro area. We identify three mechanisms driving this carbon bias: (1) carbon-intensive industries are more reactive to monetary policy shocks, which is likely driven by the U.S. shale oil and gas revolution; (2) a strong correlation between carbon emissions intensity and capital tangibility, the latter being known to strengthen monetary policy transmission in the U.S.; and (3) transition risk that reflects the amount of investment needed to transition to zero-carbon economy. These effects are not observed in the euro area, which we attribute to differing energy and mining sector dynamics. Our findings contribute to the discussion on integrating climate considerations into monetary policy.

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