Becoming Green: Decomposing the Macroeconomic Effects of Green Technology News Shocks

TL;DR

This paper investigates how news about future green technology advancements impacts the macroeconomy, revealing distinct effects of common and green-specific innovation shocks on productivity, inflation, and stock prices.

Contribution

It introduces a novel method to identify green technology news shocks using Bayesian VAR and decomposes these shocks into shared and green-specific components, enhancing understanding of green transition dynamics.

Findings

Green innovation shocks affect productivity and inflation differently.

Green-specific shocks induce inflationary pressures and stock declines.

Shared technological shocks have long-term productivity impacts.

Abstract

This paper studies the macroeconomic effects of news about future technological advancements in the green sector. Utilizing the economic value of green patents granted to publicly listed companies in the U.S., we identify green technology news shocks via a convenient and meaningful rotation of the innovations from a Bayesian Vector Autorregresion Model (BVAR). These shocks are decomposed into two orthogonal components: i) a common technological component shared by both green and non-green innovation, that reproduces response patterns similar to those expected from a technology news shock with long-run impacts on productivity; and ii) an idiosyncratic component to green innovation inducing inflationary pressures and stock price reductions. The responses to the idiosyncratic component suggest the existence of a green transition news mechanism related to expectations of more rigorous carbon policies or stricter environmental standards in the future. The focus on green innovation deepens our understanding about the effect of technology-specific news shocks and provides information of practical importance for macroeconomic and environmental policies.