Climate policy uncertainty and macroeconomic dynamics: Financial amplification and state-dependent effects

Climate policy uncertainty (CPU) poses growing risks to macroeconomic stability, yet its transmission mechanisms remain understood. While the literature has examined general uncertainty, the state-dependent effects of transition risk through the financial system are underexplored. Using U.S. local projections and a two-sector New Keynesian model, this paper examines how CPU shocks propagate across the business cycle. I find that CPU shocks significantly contract investment and credit during economic expansions, whereas their effects are statistically muted during recessions. These dynamics are driven by a brown collateral channel, where uncertainty about the future value of carbon-intensive assets triggers a financial accelerator mechanism. The findings highlight that transition risk operates as a systemic financial shock, suggesting that macro-prudential frameworks must account for the volatility of brown asset valuations.