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We study climate and macroprudential policies in an economy with financial frictions. Using a dynamic stochastic general equilibrium model featuring both a pollution market failure and a market failure in the financial sector, we explore transition risk -whether ambitious climate policy can lead to macroeconomic instability. It can, but the risk can be alleviated through macroprudential policies -taxes or subsidies on banks' assets. Then, we explore efficient climate and macroprudential policy in the long run and over business cycles. The presence of financial frictions affects the steady-state value and dynamic properties of the efficient carbon tax. Macroprudential policy alone, without a carbon tax, is not very effective at addressing the pollution externality.

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Financial regulations would help signal risks to investors