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Climate Defaults and Financial Adaptation

Toan Phan and Felipe Schwartzman

No 23-06, Working Paper from Federal Reserve Bank of Richmond

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 1% consumption drop. However, financial adaptation via catastrophe bonds and disaster insurance can reduce these losses by about 25%. 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)
Pages: 40
Date: 2023-03
New Economics Papers: this item is included in nep-agr, nep-dge, nep-env, nep-fdg and nep-opm
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DOI: 10.21144/wp23-06

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