Compounding COVID-19 and climate risks: The interplay of banks’ lending and government’s policy in the shock recovery

Nepomuk Dunz, Arthur Hrast Essenfelder, Andrea Mazzocchetti, Irene Monasterolo and Marco Raberto

Journal of Banking & Finance, 2023, vol. 152, issue C

Abstract: We assess the individual and compounding impacts of COVID-19 and climate physical risks in the economy and finance, using the EIRIN Stock-Flow Consistent model. We study the interplay between banks’ lending decisions and government’s policy effectiveness in the economic recovery process. We calibrate EIRIN on Mexico, being a country highly exposed to COVID-19 and hurricanes risks. By embedding financial actors and the credit market, and by endogenising investors’ expectations, EIRIN analyses the finance-economy feedbacks, providing an accurate assessment of risks and policy co-benefits. We quantify the impacts of compounding COVID-19 and hurricanes on GDP through time using a compound risk indicator. We find that procyclical lending and credit market constraints amplify the initial shocks by limiting firms’ recovery investments, thus mining the effectiveness of higher government spending. When COVID-19 and hurricanes compound, non-linear dynamics that amplify losses emerge, negatively affecting the economic recovery, banks’ financial stability and public debt sustainability.

Keywords: COVID-19; Climate change; Compound risk; Government policies; Stock-flow consistent model; Credit market constraints; Procyclical bank lending; Macrofinancial impacts (search for similar items in EconPapers)
JEL-codes: E40 E44 E47 G21 Q01 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:152:y:2023:i:c:s0378426621002582

DOI: 10.1016/j.jbankfin.2021.106306

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