Working Paper

Natural Disasters, Climate Change, and Sovereign Risk


Abstract: I investigate how natural disaster can exacerbate fiscal vulnerabilities and trigger sovereign defaults. I extend a standard sovereign default model to include disaster risk and calibrate it to a sample of seven Caribbean countries that are frequently hit by hurricanes. I find that hurricane risk reduces government's ability to issue debt and that climate change may further restrict market access. Next, I show that "disaster clauses", that provide debt-servicing relief, improve government ability to borrow and mitigate the adverse impact of climate change on government's borrowing conditions.

Keywords: Sovereign risk; Climate change; Natural disasters;

JEL Classification: F32; F34; Q54;

https://doi.org/10.17016/IFDP.2020.1291

Access Documents

File(s): File format is application/pdf https://www.federalreserve.gov/econres/ifdp/files/ifdp1291.pdf

Authors

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2020-07-08

Number: 1291