Climate risk and financial stress in ECOWAS

Abstract

This study examines the causal relationship between climate risk and financial stress in ECOWAS countries spanning the period from 2000–2019. We use the Multivariate Threshold Autoregressive Vector model (MTVAR) to estimate this relationship. Our findings reveal the existence of an optimal temperature threshold, below and above which a complex interplay occurs between climate risk and financial stress. This empirical evidence strongly supports the the non-linear relationship between climate risk and financial stress. Specifically, our analysis identifies 28.35°C as the optimal temperature threshold. Below this point, the contribution of climate risk to financial stress diminishes, and conversely, the financial system acts to mitigate global warming. However, above 28.35°C, climate risk exacerbates financial stress, and the financial system becomes a contributor to global warming. Public and monetary authorities need to pay more attention to the impact of climate risk on finance and the way it operates in ecological transitions.