Climate policy shocks and inflation dynamics: from the fossil fuel sector to the macroeconomy

The thesis aims to evaluate the impact of climate policy shocks on the profitability profiles of European fossil fuel firms and their effects on inflation dynamics in Euro Area countries. Utilizing the shock identification methodology proposed by Känzig (2023), the analysis first examines the influence of these shocks on firms' profitability variables through a panel linear model incorporating time and firm fixed effects, alongside additional firm-level covariates and macroeconomic controls. Subsequently, the study employs a local projection instrumental variable approach (Jordà et al., 2015) to estimate the effects of these shocks on inflation measures, both at the aggregate Euro Area (EA19) level and across individual Euro Area countries. This approach aims to uncover potential heterogeneities in transmission mechanisms arising from varying levels of exposure to national fossil fuel sectors.