Climate Disasters and Exchange Rates: Are Beliefs Keeping up with Climate Change?

Galina Hale ()
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Galina Hale: University of California Santa Cruz

IMF Economic Review, 2024, vol. 72, issue 1, No 7, 253-291

Abstract: Abstract There is clear scientific evidence of the shift in the probability distribution of climate-related disasters in recent decades. Is this shift reflected in the behavior of forward-looking measures of economic activity such as real exchange rates? I evaluate the role of different belief formation assumptions on the ability of the model to predict the response of real exchange rates to climate-related disasters. I consider Bayesian and backward-looking belief updates as well as static beliefs with no update or a one-time update. To do so, I construct a version of the Farhi-Gabaix (2015) framework augmented with explicit belief formation. I use two approaches to model calibration and simulate the model for 47 countries for 1964–2019 using actual data for climate-related disasters. I find that in general differences in belief formation do not have much effect on the model fit because the productivity loss component dominates the predicted response. Specifically, I find that even in recent years there is no evidence of Bayesian beliefs being a better fit for the data.

JEL-codes: F21 F23 F64 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1057/s41308-023-00231-w

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