Abstract
Recent research in financial economics has shown that rare large disasters have the potential to disrupt financial sectors via the destruction of capital stocks and jumps in risk premia. These disruptions often entail negative feedback effects on the macroeconomy. Research on disaster risks has also actively been pursued in the macroeconomic models of climate change. Our paper uses insights from the former work to study disaster risks in the macroeconomics of climate change and to spell out policy needs. Empirically the link between carbon dioxide emission and the frequency of climate related disaster is investigated using cross-sectional and panel data. The modeling part then uses a multi-phase dynamic macro model to explore this causal nexus and the effects of rare large disasters resulting in capital losses and rising risk premia. Our proposed multi-phase dynamic model, incorporating climate-related disaster shocks and their aftermath as one phase, is suitable for studying mitigation and adaptation policies.
Highlights
Much recent research in the economics of climate change has utilized modern statistical and econometric methods to study the links between GDP growth, greenhouse gas (GHG) emission, global warming, and climate-related disasters
We explore the link between rising carbon dioxide levels in the atmosphere and the frequency of climate disasters in seven regions: East Asia and Pacific (EAS), Europe and Central Asia (ECS), Latin America and the Caribbean (LCN), Middle East and North Africa (MEA), 2Relevant literature on monetary policy and climate change are McKibbin et al (2017) and Fratzscher et al (2017)
In this paper we relate the extensive research on financial crises disasters, and their triggered macro feedback effects, to climate disaster risk, using modeling insight of the former studying the latter
Summary
Much recent research in the economics of climate change has utilized modern statistical and econometric methods to study the links between GDP growth, greenhouse gas (GHG) emission, global warming, and climate-related disasters. In b oth cases actual output may recover in the short run, but potential capacity is reduced, while physical, public and human capital will be destroyed, causing persistently low growth in the future This effect is often referred to as a hysteresis effect of shocks. In doing so we build on a macro model developed by Bonen et al (2016), Maurer et al (2018) and Semmler et al (2018) which allows for studying the issue of large climaterelated disaster shocks and climate change policies. Our model explicitly solves for fiscal and financial resources to deal with trade-offs of mitigation and adaptation p olicies These policies are operationalized as time varying shares of public capital in support of carbonneutral productivity-enhancing infrastructure, mitigation and adaptation capital.
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