Natural disasters, climate change, and sovereign risk

Mallucci, Enrico

doi:10.1016/j.jinteco.2022.103672

Cited by 23 publications

(12 citation statements)

References 31 publications

(32 reference statements)

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“…Since the country is impatient relative to foreign lenders, the country will prefer to hedge the disaster risk using shorter-term disaster insurance contracts than using longer-term CAT bonds. Finally, as pointed out by Mallucci (2022), the introduction of CAT bonds reduces the borrowing cost per unit of bond issuance, leading to more accumulation of debt, which in turn leads to higher consumption in the short run but lower net worth and hence lower consumption and utility in the long run.…”

Section: Catastrophe Bondsmentioning

confidence: 94%

“…4 Our paper connects the climate economics literature to the growing literature on sovereign default, including Eaton and Gersovitz (1981), Bulow and Rogoff (1989), Aguiar and Gopinath (2006), Arellano (2008), Yue (2010), Mendoza and Yue (2012), Bai and Zhang (2012), Chatterjee and Eyigungor (2015), Hatchondo et al (2016), Phan (2016Phan ( , 2017b, Park (2017), Dovis (2019), Bianchi et al (2019), Joo (2020), andda Rocha et al (2022). 5 A related paper is Mallucci (2022), which introduces hurricane risk and CAT bonds into a quantitative endowment economy framework with long-term debt carefully calibrated to a sample of Caribbean countries and provides a refined discussion of the impact of disaster risk on spreads. In studying disastercontingent bonds, our paper is also related to those that analyze the potential effects of making sovereign debt more state-contingent, such as Grossman and Van Huyck (1988), Alfaro and Kanczuk (2005), Adam andGrill (2017), andBorensztein et al (2017).…”

Section: Introductionmentioning

confidence: 96%

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Climate Defaults and Financial Adaptation

Phan¹,

Schwartzman²

2023

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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.

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Section: Catastrophe Bondsmentioning

confidence: 94%

Section: Introductionmentioning

confidence: 96%

Climate Defaults and Financial Adaptation

Phan¹,

Schwartzman²

2023

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“…The impact of natural disasters on sovereign risk has garnered recent attention in the literature. According to Mallucci (2022), natural disasters diminish governments' capacity to borrow from abroad and depress overall welfare. In Mallucci's framework, disasters are modeled as exogenous shocks to income and are calibrated to replicate the frequency and intensity of major hurricanes in a sample of seven small Caribbean economies.…”

Section: 3mentioning

confidence: 99%

“…The second set of studies to which we contribute, which analyzes the impacts of climate change preparation and vulnerability and natural disasters on sovereign risk, is still in its infancy. Notable contributions have recently been made by Bolton et al (2022) and Klusak et al (2023) from a policy-oriented perspective and Mallucci (2022) from a theoretical standpoint that explicitly incorporates natural disasters and climate change risk into a traditional framework of sovereign debt price determination in the vein of Hatchondo and Martinez (2009) and Chatterjee et al (2023). Bolton et al (2022) offer a comprehensive overview of the literature linking sovereign debt and climate change risk, examining various dimensions of the interplay between climate and debt.…”

Section: Introductionmentioning

confidence: 99%

Asymmetric Sovereign Risk: Implications for Climate Change Preparation

Gomez-Gonzalez,

Uribe,

Valencia

2024

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Climate change adaptation efforts are heavily dependent on a countrys fiscal capacity and the associated costs of undertaking adaptation policies. The current accumulation of high debt levels in emerging and low-income developing countries, which are disproportionately affected by climate change, raises significant concerns. This study shows that sovereign risk, and hence funding costs for governments, exhibits significantly asymmetric reactions to its determinants across the conditional distribution of credit spreads. This aspect, previously overlooked in the literature, has relevant policy implications. Countries with elevated risk levels are disproportionately vulnerable to climate change compared to their lower-risk counterparts, especially in the short term. Notably, investing in climate change preparedness proves effective in mitigating vulnerability to climate change, in terms of sovereign risk, particularly for countries with low spreads and long-term debt (advanced economies), where readiness and vulnerability tend to counterbalance each other. However, for countries with high spreads and short-term debt, additional measures are essential as climate change readiness alone is insufficient to offset vulnerability effects in this case. Results also demonstrate that the actual occurrence of natural disasters is less influential than vulnerability to climate change in determining spreads.

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“…CR not only derives from the direct effects of climate change but is also closely linked to economic and social vulnerability, with uncertainty and unpredictability in its economic consequences. The characteristics of CR determine the significance of its impact on both macroeconomic and financial systems (Baarsch et al., 2020; Caby et al., 2022; Cappelli et al., 2021; Chen, Liu, et al., 2021; Gu & Hale, 2023; Lee et al., 2023; Mallucci, 2022; Nakano, 2021; Zhang, Cheng, et al., 2022). In terms of innovation, climate disasters also significantly hamper technological innovation and the transfer of such technology, by damaging communications and transportation facilities (Chen, Li, et al., 2021).…”

Section: Literature Review and Research Hypothesismentioning

confidence: 99%

Climate risk and renewable energy technological innovation: An institutional environment perspective

2023

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To explore whether climate risk (CR) affects renewable energy technological innovation (RETI) and its boundary conditions, this study examines the relationship between CR and RETI as moderated by institutional environment. Based on panel data of 60 countries for the period 2000–2019, we show that CR is not conducive to RETI, and that its negative marginal impact shows an inverted U‐shaped trend with the improvement of RETI. Heterogeneity analysis shows that floods and storms have the greatest negative impacts on RETI, and that innovations in solar and wind energy technologies are more vulnerable to the adverse shocks of CR. Furthermore, CR has a greater adverse effect on RETI in developing countries than in developed countries. However, the institutional environment, especially the economic institutional environment, can work to mitigate the negative effect of CR on RETI. Our findings not only enrich the research on the economic consequences of CR but also provide effective ways to mitigate the adverse impact of CR on RETI from the perspective of institutional environment.

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Natural disasters, climate change, and sovereign risk

Cited by 23 publications

References 31 publications

Climate Defaults and Financial Adaptation

Climate Defaults and Financial Adaptation

Asymmetric Sovereign Risk: Implications for Climate Change Preparation

Climate risk and renewable energy technological innovation: An institutional environment perspective

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