Physical climate change and the sovereign risk of emerging economies

Hannes Boehm ()
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Hannes Boehm: Halle Institute of Economic Research: Leibniz Institut für Wirtschaftsforschung Halle

Journal of Economic Structures, 2022, vol. 11, issue 1, 1-41

Abstract: Abstract I show that rising temperatures can detrimentally affect the sovereign creditworthiness of emerging economies. To this end, I collect long-term monthly temperature data of 54 emerging markets. I calculate a country’s temperature deviation from its historical average, which approximates present-day climate change trends. Running regressions from 1994m1 to 2018m12, I find that higher temperature anomalies lower sovereign bond performances (i.e., increase sovereign risk) significantly for countries that are warmer on average and have lower seasonality. The estimated magnitudes suggest that affected countries likely face significant increases in their sovereign borrowing costs if temperatures continue to rise due to climate change. However, results indicate that stronger institutions can make a country more resilient towards temperature shocks, which holds independent of a country’s climate.

Keywords: Climate risks; Sovereign risk; International finance; Emerging market economies; Institutions (search for similar items in EconPapers)
JEL-codes: G15 H63 O13 Q54 Q56 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1186/s40008-022-00284-6

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