Climate defaults and financial adaptation

Toàn Phan and Felipe Schwartzman

European Economic Review, 2024, vol. 170, issue C

Abstract: We analyze the relationship between climate-related disasters and sovereign debt crises using a model with capital accumulation, sovereign default, and disaster risk. We find that disaster risk and default risk together lead to slow post-disaster recovery and heightened borrowing costs. Calibrating the model to Mexico, we find that the increase in cyclone risk due to climate change leads to a welfare loss equivalent to a permanent 0.95% consumption drop. However, financial adaptation via catastrophe bonds and disaster insurance can reduce these losses by about 21%. Our study highlights the importance of financial frictions in analyzing climate change impacts.

Keywords: Climate change; Disasters; Sovereign default; Emerging markets; Growth (search for similar items in EconPapers)
JEL-codes: F41 F44 H63 H87 Q54 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:170:y:2024:i:c:s0014292124001958

DOI: 10.1016/j.euroecorev.2024.104866

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