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Working Paper
Robust Dynamic Optimal Taxation and Environmental Externalities
We study a dynamic stochastic general equilibrium model in which agents are concerned about model uncertainty regarding climate change. An externality from greenhouse gas emissions damages the economy's capital stock. We assume that the mapping from climate change to damages is subject to uncertainty, and we use robust control theory techniques to study efficiency and optimal policy. We obtain a sharp analytical solution for the implied environmental externality and characterize dynamic optimal taxation. A small increase in the concern about model uncertainty can cause a significant drop in ...
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-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
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
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
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 ...
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
The rising tide lifts some interest rates: climate change, natural disasters, and loan pricing
We investigate how corporate loan costs are affected by climate change-related natural disasters. We construct granular measures of borrowers’ exposure to natural disasters and then disentangle the direct effects of disasters from the effects of lenders updating their beliefs about the impact of future disasters. Following a climate change-related disaster, spreads on loans of at-risk, yet unaffected borrowers, spike and are amplified when attention to climate change is high. Weaker borrowers with the most extreme exposure to these disasters suffer the highest increase in spreads. ...
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
Long-Term Macroeconomic Effects of Climate Change: A Cross-Country Analysis
We study the long-term impact of climate change on economic activity across countries, using a stochastic growth model where labor productivity is affected by country-specific climate variables?defined as deviations of temperature and precipitation from their historical norms. Using a panel data set of 174 countries over the years 1960 to 2014, we find that per-capita real output growth is adversely affected by persistent changes in the temperature above or below its historical norm, but we do not obtain any statistically significant effects for changes in precipitation. Our counterfactual ...