The nexus between climate change risk and financial policy uncertainty

Abstract

We investigate the role of financial policy uncertainty in climate change risk. We use the financial policies uncertainty index to estimate its composite effectiveness on climate change. We test the financial development role from two perspectives covering the credit channel and market liquidation facilities for climate change. We also test the role of financial policy uncertainty through moderating channels of renewable energy production and financial development. Our sample comprises 42 developing economies from 1991 to 2020. We apply the fixed‐effects estimation, feasible generalized least squares (FGLS) method and bootstrap quantile to analyze the results. The empirical results reveal that financial policy uncertainty plays a significant role in climate change risk. We conclude that climate change risk management policies and financial policy uncertainties should be considered as key indicators of financial development.