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 hurricane risk reduces governments’ ability to issue debt and depresses welfare. Climate change will further restrict governments’ access to financial markets and weigh on welfare. “Disaster clauses”, especially those allowing governments to write off debt, improve governments’ borrowing terms and mitigate the impact of climate change on governments’ access to financial markets and households’ welfare.