Climate policy uncertainty, sustainable finance and macro-financial interconnectedness

Анотація

Climate policy uncertainty (CPU) has emerged as a critical factor influencing investment decisions, financial market dynamics, and the transition toward a sustainable economy. This study investigates the dynamic and asymmetric interconnectedness among CPU, key macroeconomic indicators, industrial output, energy markets and financial markets in the United States. Using monthly data, we employ an integrated econometric framework combining time-varying Parameter Vector Autoregression (TVP-VAR) and Quantile Vector Autoregression (QVAR) models to capture connectedness patterns across bearish, normal and bullish market regimes. The empirical findings reveal substantial heterogeneity in spillover dynamics across market states. At the average market level, energy prices and monetary policy variables emerge as the dominant transmitters of shocks, while CPU and industrial output function primarily as net receivers. Under bullish conditions, however, CPU becomes a significant source of shocks to financial markets and clean energy assets, with interconnectedness intensifying markedly during extreme market conditions. These results establish CPU as a regime-dependent driver of macro-financial connectedness, extending the predictions of Uncertainty Investment Theory and Real Options Theory. The findings highlight the importance of stable, credible climate policies and the need for investors to incorporate CPU into risk management and portfolio allocation strategies.Impact StatementThis study examines how climate policy uncertainty influences the interconnectedness of macroeconomic, energy, industrial, and financial markets. Using advanced econometric techniques, it shows that the effects of climate policy uncertainty vary across market conditions and become particularly influential during extreme market states. The findings highlight the importance of stable and credible climate policies for reducing uncertainty, supporting investment decisions, and promoting financial stability during the transition to a sustainable economy.

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