Climate change and exchange rate variables: A potential storm of urban debt

Yan Wang and Lianjiao Hu

International Review of Financial Analysis, 2025, vol. 105, issue C

Abstract: In the context of the global economic and environmental landscape, the dynamic changes in local government debt levels driven by climate and exchange rate factors have become the focus of attention of academics and policymakers. Based on panel data from China's prefecture-level cities from 2007 to 2023, this study delves into the intricate relationship between climate change shocks, exchange rate fluctuations, and local government debt levels. Research shows that climate change shocks play an important role in increasing local government debt levels, and that this impact varies across regions with different levels of economic openness. Through mechanism analysis, it is found that exchange rate fluctuations play a mediating role in the process of climate change shocks affecting debt accumulation, and this mediating effect varies greatly in different geographical regions. In addition, the moderating effect analysis shows that the elasticity of industrial structure has a significant moderating effect on the relationship between climate change shocks and local government debt levels, and there is a threshold effect on this impact. This study provides empirical evidence for understanding the complex interaction between environmental factors, financial market volatility and fiscal policy in local economic governance, which can help policymakers formulate region-specific strategies, manage climate-related financial risks, and optimize local government debt management, so as to achieve sustainable local economic development.

Keywords: Climate change impacts; RMB exchange rate fluctuations; Local government debt levels; Resilience of industrial structure (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:105:y:2025:i:c:s1057521925005095

DOI: 10.1016/j.irfa.2025.104422

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