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An Exogenous Risk in Fiscal-Financial Sustainability: Dynamic Stochastic General Equilibrium Analysis of Climate Physical Risk and Adaptation Cost

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  • Shuqin Gao

    (Harvard Economics Department, Harvard University, Cambridge, MA 02138, USA
    UNDP Sustainable Finance Hub, New York, NY 10017, USA)

Abstract

This research aims to explore the fiscal and public finance viability on climate physical risk externalities cost for building social-economic-environmental sustainability. It analyzes climate physical risk impact on the real business cycle to change the macroeconomic output functions, its regressive cyclic impact alters tax revenue income and public expenditure function; This research also analyzes that the climate physical risk escalates social-economic inequality and change fiscal-financial policy functions, illustrates how the climate damage cost and adaptation cost distorts fiscal-finance cyclical and structural equilibrium function. This research uses binary and multinomial logistic regression analysis, dynamic stochastic general equilibrium method (DSGE) and Bayesian estimation model. Based on the climate disaster compensation scenarios, damage cost and adaptation cost, analyzing the increased public expenditure and reduced revenue income, demonstrates how climate physical risk externalities generate binary regression to financial fiscal equilibrium, trigger structural and cyclical public budgetary deficit and fiscal cliff. This research explores counterfactual balancing measures to compensate the fiscal deficit from climate physical risk: effectively allocating resources and conducting the financial fiscal intervention, building greening fiscal financial system for creating climate fiscal space.

Suggested Citation

  • Shuqin Gao, 2024. "An Exogenous Risk in Fiscal-Financial Sustainability: Dynamic Stochastic General Equilibrium Analysis of Climate Physical Risk and Adaptation Cost," JRFM, MDPI, vol. 17(6), pages 1-18, June.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:6:p:244-:d:1412608
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    References listed on IDEAS

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    1. Marshall Burke & Kyle Emerick, 2016. "Adaptation to Climate Change: Evidence from US Agriculture," American Economic Journal: Economic Policy, American Economic Association, vol. 8(3), pages 106-140, August.
    2. Tatyana Deryugina & Solomon M. Hsiang, 2014. "Does the Environment Still Matter? Daily Temperature and Income in the United States," NBER Working Papers 20750, National Bureau of Economic Research, Inc.
    3. Peter A. Stott & D. A. Stone & M. R. Allen, 2004. "Human contribution to the European heatwave of 2003," Nature, Nature, vol. 432(7017), pages 610-614, December.
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