Natural Disasters, Climate Change, and Sovereign Risk

Enrico Mallucci

No 1291r1, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: I investigate how natural disasters can exacerbate fiscal vulnerabilities and trigger sovereign defaults. I extend a standard sovereign default model to include disaster risk and calibrate it to a sample of seven Caribbean countries that are frequently hit by hurricanes. I find that disaster risk reduces government's ability to issue debt and that climate change further restricts government's access to financial markets. Next, I show that "disaster clauses", that provide debt-servicing relief, allow governments to borrow more and preserve government's access to financial markets, amid rising risk of disasters. Yet, debt limits may need to be adopted to avoid overborrowing and a decline of welfare.

Keywords: Sovereign risk; Climate change; Natural disasters (search for similar items in EconPapers)
JEL-codes: F32 F34 Q54 (search for similar items in EconPapers)
Pages: 34
Date: 2020-07-08, Revised 2020-10-14
New Economics Papers: this item is included in nep-env
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Natural disasters, climate change, and sovereign risk (2022)
Working Paper: Natural Disasters, Climate Change, and Sovereign Risk (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1291

DOI: 10.17016/IFDP.2020.1291r1

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