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Working Paper
Climate-related Financial Stability Risks for the United States: Methods and Applications
This report has two objectives: 1. Review the available literature on Climate-Related Financial Stability Risks (CRFSRs) as it pertains to the United States. Specifically, the literature review considers several modeling approaches and aims to 1.1 Identify financial market vulnerabilities (e.g., bank leverage), 1.2 Provide an assessment of those vulnerabilities (high/medium/low) as identified by the current literature, and 1.3 Evaluate the uncertainty surrounding these assessments based on interpretation of the findings and coverage of existing literature (high/low). 2. Identify methodologies ...
Working Paper
Climate Change and Financial Policy: A Literature Review
This article reviews the rapidly proliferating economic literature on climate change and financial policy. We find: (1) enduring challenges in estimating the statistical properties of a changed climate; (2) emerging evidence of financial markets pricing in climate-related risks; and (3) a range of significant institutional distortions preventing such pricing from being complete. Finally, we argue that geographic regions may be an especially fruitful unit of analysis for understanding the financial impact of climate change.
Working Paper
Natural Disasters, Climate Change, and Sovereign Risk
I investigate how natural disasters 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 disaster risk reduces government's ability to issue debt and that climate change further restricts government's access to financial markets. Next, I show that "disaster clauses", that provide debt-servicing relief, allow governments to borrow more and preserve government's access to financial markets, amid rising ...
Working Paper
Climate Change and Double Materiality in a Micro- and Macroprudential Context
This paper presents a stylized framework of bank risk-taking to help clarify the concept of "double materiality," the idea that supervisory authorities should consider both the risks that banks face from climate change and the impact of a bank’s actions on climate change. The paper shows that the concept of double materiality can be coherently embedded in a microprudential framework, but the practical implications could be quite similar to the implications of a single materiality perspective. The importance of a double materiality perspective becomes larger when one considers ...
Working Paper
Climate Change and Double Materiality in a Micro- and Macroprudential Context
This paper presents a stylized framework of bank risk-taking to help clarify the concept of "double materiality," the idea that supervisory authorities should consider both the risks that banks face from climate change and the impact of a bank’s actions on climate change. The paper shows that the concept of double materiality can be coherently embedded in a microprudential framework, but the practical implications could be quite similar to the implications of a single materiality perspective. The importance of a double materiality perspective becomes larger when one considers ...
Working Paper
Natural Disasters, Climate Change, and Sovereign Risk
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.
Working Paper
Sellin’ in the Rain: Adaptation to Weather and Climate in the Retail Sector
Using novel methodology and proprietary daily store-level sporting goods and apparel brand data, I find that, consistent with long-run adaptation to climate, sales sensitivity to weather declines with historical norms and variability of weather. Short-run adaptation to weather shocks is dominated by changes in what people buy and how they buy it, with little intertemporal substitution. Over four weeks, a one-standard deviation one-day weather shock shifts sales by about 10 percent. While switching between indoor and outdoor stores offsets a small portion of contemporaneous responses to ...
Working Paper
Adaptation and the Cost of Rising Temperature for the U.S. Economy
How costly will rising temperature due to climate change be for the U.S. economy? Recent research has used the well-identified response of output to weather to estimate this cost. But agents may adapt to the new climate. We propose a methodology to infer adaptation technology from the heterogeneous responses of output to weather observed currently across the U.S. Our model estimates how much each region has adapted already, and can predict how much each will adapt further after climate change. The size and distribution of losses from climate change vary substantially once adaptation is taken ...
Working Paper
Climate Change and the Role of Regulatory Capital: A Stylized Framework for Policy Assessment
This paper presents a stylized framework to assess conceptually how the financial risks of climate change could interact with a regulatory capital regime. We summarize core features of a capital regime such as expected and unexpected losses, regulatory ratios and risk-weighted assets, and minimum requirements and buffers, and then consider where climate-related risk drivers may be relevant. We show that when considering policy implications, it is critically important to be precise about how climate change may impact the loss-generating process for banks and to be clear about the specific ...
Working Paper
Growth at Risk From Climate Change
How will climate change affect risks to economic activity? Research on climate impacts has tended to focus on effects on the average level of economic growth. I examine whether climate change may make severe contractions in economic activity more likely using quantile regressions linking growth to temperature. The effects of temperature on downside risks to economic growth are large and robust across specifications. These results suggest the growth at risk from climate change is large—climate change may make economic contractions more likely and severe and thereby significantly ...