Shaken Balances: Climate Risks and the Dynamics of Fiscal and External Sustainability

Antonio Afonso, José Alves, João Jalles and Sofia Monteiro

No 2025/0375, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper examines the impact of natural disasters on fiscal and external sustainability across 134 economies from 1980 to 2023. We adopt a two-step approach: first, we estimate country-specific, time-varying sustainability coefficients; second, we assess their determinants using Weighted Least Squares panel regressions with fixed effects. To complement the long-run analysis, we employ local projections to capture the short-term dynamics following disaster-related mortality, vulnerability, and resilience shocks. Results show that natural disasters weaken fiscal sustainability, particularly in emerging and vulnerable economies. Vulnerability exacerbates fiscal and external fragility, while resilience mitigates adverse effects on public accounts. Local projections reveal that fiscal sustainability deteriorates significantly in the medium term after disaster shocks, whereas external sustainability responses are more muted and heterogeneous. Together, these findings highlight the importance of combining long- and short-run approaches to understand how climate shocks propagate through macroeconomic channels and to inform adaptive, risk-sensitive fiscal policy frameworks.

Keywords: Fiscal Sustainability; External Sustainability; Climate Risk; Natural Disasters; Local Projections; Weighted Least Squares. (search for similar items in EconPapers)
JEL-codes: C33 E62 F32 H63 O23 Q54 (search for similar items in EconPapers)
Date: 2025-04
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