Research

In mid-2024, the European Central Bank (ECB) and the U.S.\ Federal Reserve (Fed) pursued divergent monetary policies, breaking a period of monetary policy synchronization. This paper asks whether such divergence matters for the transmission of ECB monetary policy. Using state-dependent local projections, I show that during U.S.\ monetary expansions, an ECB tightening generates sign-reversed responses: output and inflation rise. By contrast, a Fed tightening is contractionary regardless of ECB policy. I rationalize these findings in a two-country New Keynesian DSGE model with financial frictions operating through a global investor. Dollar as the international currency, a no-arbitrage condition linking capital returns, and deviations from uncovered interest parity jointly imply that an easing of U.S.\ monetary policy lowers dollar funding costs and relaxes the global investor's balance-sheet constraint, prompting a reallocation toward higher-return euro area assets, and thereby conditioning the transmission of ECB monetary policy.

We quantify the macroeconomic and welfare effects of time-varying uncertainty in climate damages. Using historical evidence since the 1980s, we document that the frequency of costly climate events has risen and that total physical costs (as a share of GDP) have roughly tripled by 2023; decade-specific maximum losses fluctuate between 0.36% and 0.99%, signaling increasing variability. We develop a closed-economy RBC-DSGE model with energy use in which accumulated atmospheric CO₂ depresses productivity and—in addition—raises the volatility of the Solow residual over time. Calibrated to U.S. business-cycle moments, energy use, and carbon dynamics, the model yields analytical generalized impulse response functions. A level shock to climate damages generates larger and more persistent downturns than a standard productivity shock. A volatility shock—greater uncertainty about damages at a given CO₂ level—induces precautionary adjustments in consumption, investment, energy use, and labor, producing contractions comparable in size to level shocks but with greater persistence. Welfare analysis shows that climate risk imposes sizable costs that exceed conventional business-cycle costs, surpassing the Lucas (1987) benchmark by more than a factor of four. The results highlight the need to incorporate risk—beyond average damages—into macroeconomic assessments and climate policy design.