Time-frequency cross-country spillovers of climate policy uncertainty: Does it matter for financial risk?

This paper introduces the TVP-VAR-BK model to explore the dynamic nature of cross-country spillover effects of global climate policy uncertainty and its cyclical variations, both in time and frequency domains. Furthermore, it employs the TVP-SVAR-SV model to investigate how external climate policy uncertainty influences financial risk. The findings reveal several key points: climate policy uncertainty exhibits notable cross-country transmission, primarily characterized by short-term, high-frequency spillovers. These spillovers tend to be weaker within the same region and stronger across regions, with Germany, France, and Canada identified as major sources. Foreign trade and similar industrial structures serve as primary channels for these spillovers. Short-term spillovers of climate policy uncertainty have a more pronounced, mostly positive impact on financial risk compared to longterm effects, highlighting the role of investor risk perception. Additionally, increased economic policy uncertainty amplifies the influence of climate policy uncertainty on financial risk. Overall, these insights underscore the importance of considering external climate policy uncertainty, enabling countries to effectively mitigate imported financial risks while advancing their economic green transformation.