IDEAS home Printed from https://ideas.repec.org/a/spr/climat/v177y2024i10d10.1007_s10584-024-03814-2.html
   My bibliography  Save this article

Does climate change affect the financial stability of Sub-Saharan African countries?

Author

Listed:
  • Getaneh Mihret Ayele

    (Bahir Dar University)

  • Fentaw Leykun Fisseha

    (Bahir Dar University)

Abstract

This study examined how climate change impacts the financial stability of Sub-Saharan Africa (SSA) using panel data spanning from 2010 to 2018. Using the System Generalized Method of Moments (SGMM), the study revealed that climate change exerts a significant negative effect on the financial stability of SSA both in the short and long-run. Specifically, compared to negative shock, a positive shock to mean temperature would cause a significant negative adjustment to the financial stability both in the short- and long-run. Moreover, the results showed that climate change poses a greater threat to financial stability in the long-run compared to the short-term. The standardized precipitation index also has a significant positive impact on financial stability in the long-run. Thus, governments and financial regulators in SSA should address climate-induced financial risks, particularly physical risks, through consistent and congruent climate policy responses. Central banks should integrate climate risks into their core policy and regulatory frameworks using climate-risk assessment tools like stress tests, mandating firms across sectors to disclose minimum climate-related information, and offering incentives for green investments with clear eligibility criteria to bridge the climate funding gap and proactively mitigate climate risks.

Suggested Citation

  • Getaneh Mihret Ayele & Fentaw Leykun Fisseha, 2024. "Does climate change affect the financial stability of Sub-Saharan African countries?," Climatic Change, Springer, vol. 177(10), pages 1-22, October.
  • Handle: RePEc:spr:climat:v:177:y:2024:i:10:d:10.1007_s10584-024-03814-2
    DOI: 10.1007/s10584-024-03814-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10584-024-03814-2
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s10584-024-03814-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hyman P. Minsky, 1977. "The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to“Standard” Theory," Challenge, Taylor & Francis Journals, vol. 20(1), pages 20-27, March.
    2. Roncoroni, Alan & Battiston, Stefano & Escobar-Farfán, Luis O.L. & Martinez-Jaramillo, Serafin, 2021. "Climate risk and financial stability in the network of banks and investment funds," Journal of Financial Stability, Elsevier, vol. 54(C).
    3. Marshall Burke & Solomon M. Hsiang & Edward Miguel, 2015. "Global non-linear effect of temperature on economic production," Nature, Nature, vol. 527(7577), pages 235-239, November.
    4. Klomp, Jeroen, 2014. "Financial fragility and natural disasters: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 180-192.
    5. Eric Strobl, 2011. "The Economic Growth Impact of Hurricanes: Evidence from U.S. Coastal Counties," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 575-589, May.
    6. Simon Dietz & Alex Bowen & Charlie Dixon & Philip Gradwell, 2016. "‘Climate value at risk’ of global financial assets," Nature Climate Change, Nature, vol. 6(7), pages 676-679, July.
    7. Bun, Maurice J. G. & Kiviet, Jan F., 2003. "On the diminishing returns of higher-order terms in asymptotic expansions of bias," Economics Letters, Elsevier, vol. 79(2), pages 145-152, May.
    8. Eleftherios Giovanis & Oznur Ozdamar, 2022. "The impact of climate change on budget balances and debt in the Middle East and North Africa (MENA) region," Climatic Change, Springer, vol. 172(3), pages 1-27, June.
    9. Dafermos, Yannis & Nikolaidi, Maria & Galanis, Giorgos, 2018. "Climate Change, Financial Stability and Monetary Policy," Ecological Economics, Elsevier, vol. 152(C), pages 219-234.
    10. Blaise Gadanecz & Kaushik Jayaram, 2009. "Measures of financial stability - a review," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring financial innovation and its impact", Basel, 26-27 August 2008, volume 31, pages 365-380, Bank for International Settlements.
    11. Albulescu, Claudiu Tiberiu, 2010. "Forecasting The Romanian Financial System Stability Using A Stochastic Simulation Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 81-98, March.
    12. Stefano Battiston & Antoine Mandel & Irene Monasterolo & Franziska Schütze & Gabriele Visentin, 2017. "A climate stress-test of the financial system," Nature Climate Change, Nature, vol. 7(4), pages 283-288, April.
    13. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
    14. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    15. Martin Gassebner & Alexander Keck & Robert Teh, 2010. "Shaken, Not Stirred: The Impact of Disasters on International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 351-368, May.
    16. Melissa Dell & Benjamin F. Jones & Benjamin A. Olken, 2014. "What Do We Learn from the Weather? The New Climate-Economy Literature," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 740-798, September.
    17. Michel Aglietta & Etienne Espagne, 2016. "Climate and finance systemic risks, more than an analogy? The climate fragility hypothesis," Working Papers 2016-10, CEPII research center.
    18. Eduardo Cavallo & Sebastian Galiani & Ilan Noy & Juan Pantano, 2013. "Catastrophic Natural Disasters and Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1549-1561, December.
    19. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-744, June.
    20. Kakuho Furukawa & Hibiki Ichiue & Noriyuki Shiraki, 2020. "How Does Climate Change Interact with the Financial System? A Survey," Bank of Japan Working Paper Series 20-E-8, Bank of Japan.
    21. Signe Krogstrup & William Oman, 2019. "Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature," IMF Working Papers 2019/185, International Monetary Fund.
    22. Burke, Marshall & Hsiang, Solomon M & Miguel, Edward, 2015. "Global non-linear effect of temperature on economic production," Department of Economics, Working Paper Series qt3g72r0zv, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    23. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
    24. Nikola Fabris, 2020. "Financial Stability and Climate Change," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(3), pages 27-43.
    25. Yannis Dafermos, 2022. "Climate change, central banking and financial supervision: beyond the risk exposure approach," Chapters, in: Sylvio Kappes & Louis-Philippe Rochon & Guillaume Vallet (ed.), The Future of Central Banking, chapter 8, pages 175-194, Edward Elgar Publishing.
    26. Bruno, Giovanni S.F., 2005. "Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models," Economics Letters, Elsevier, vol. 87(3), pages 361-366, June.
    27. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    28. Mr. Garry J. Schinasi, 2004. "Defining Financial Stability," IMF Working Papers 2004/187, International Monetary Fund.
    29. Simon Dietz & Nicholas Stern, 2015. "Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus' Framework Supports Deep Cuts in Carbon Emissions," Economic Journal, Royal Economic Society, vol. 0(583), pages 574-620, March.
    30. Bovari, Emmanuel & Giraud, Gaël & Mc Isaac, Florent, 2018. "Coping With Collapse: A Stock-Flow Consistent Monetary Macrodynamics of Global Warming," Ecological Economics, Elsevier, vol. 147(C), pages 383-398.
    31. Ben Lockwood, 2004. "How Robust is the Kearney/Foreign Policy Globalisation Index?," The World Economy, Wiley Blackwell, vol. 27(4), pages 507-523, April.
    32. Stephane Hallegatte, 2019. "Disasters’ impacts on supply chains," Nature Sustainability, Nature, vol. 2(9), pages 791-792, September.
    33. Bernstein, Asaf & Gustafson, Matthew T. & Lewis, Ryan, 2019. "Disaster on the horizon: The price effect of sea level rise," Journal of Financial Economics, Elsevier, vol. 134(2), pages 253-272.
    34. Thomas Allen & Stéphane Dees & Jean Boissinot & Carlos Mateo Caicedo Graciano & Valérie Chouard & Laurent Clerc & Annabelle de Gaye & Antoine Devulder & Sébastien Diot & Noémie Lisack & Fulvio Pegorar, 2020. "Climate-Related Scenarios for Financial Stability Assessment: an Application to France," Working papers 774, Banque de France.
    35. Akosah, Nana & Loloh, Francis & Lawson, Natalia & Kumah, Claudia, 2018. "Measuring Financial Stability in Ghana: A New Index-Based Approach," MPRA Paper 86634, University Library of Munich, Germany.
    36. Mats Andersson & Patrick Bolton & Frédéric Samama, 2016. "Governance and Climate Change: A Success Story in Mobilizing Investor Support for Corporate Responses to Climate Change," Journal of Applied Corporate Finance, Morgan Stanley, vol. 28(2), pages 29-33, June.
    37. James R. Brown & Matthew T. Gustafson & Ivan T. Ivanov, 2021. "Weathering Cash Flow Shocks," Journal of Finance, American Finance Association, vol. 76(4), pages 1731-1772, August.
    38. Wolfgang Pointner & Doris Ritzberger-Grünwald, 2019. "Climate change as a risk to financial stability," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 38, pages 30-45.
    39. Crockett, A, 1997. "The Theory and Practice of Financial Stability," Princeton Essays in International Economics 203, International Economics Section, Departement of Economics Princeton University,.
    40. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
    41. Giuzio, Margherita & Krušec, Dejan & Levels, Anouk & Melo, Ana Sofia & Mikkonen, Katri & Radulova, Petya, 2019. "Climate change and financial stability," Financial Stability Review, European Central Bank, vol. 1.
    42. Miles Parker, 2018. "The Impact of Disasters on Inflation," Economics of Disasters and Climate Change, Springer, vol. 2(1), pages 21-48, April.
    43. Gaël Giraud & Florent MCISAAC & Emmanuel BOVARI, 2018. "Coping with the Collapse: A Stock-Flow Consistent Monetary Macrodynamics of Global Warming - Updated version dated July 2017," Working Paper 987f5d77-9601-4865-9ce1-4, Agence française de développement.
    44. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    45. Batten,, Sandra & Sowerbutts, Rhiannon & Tanaka, Misa, 2016. "Let’s talk about the weather: the impact of climate change on central banks," Bank of England working papers 603, Bank of England.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Odongo, Maureen & Misati, Roseline Nyakerario & Kageha, Caren & Wamalwa, Peter Simiyu, 2023. "Sustainable financing, climate change risks and bank stability in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 71, Kenya Bankers Association (KBA).
    2. Christian Growitsch & Marcus Stronzik, 2014. "Ownership unbundling of natural gas transmission networks: empirical evidence," Journal of Regulatory Economics, Springer, vol. 46(2), pages 207-225, October.
    3. Roberto Dell'Anno & Adalgiso Amendola, 2015. "Social Exclusion and Economic Growth: An Empirical Investigation in European Economies," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 61(2), pages 274-301, June.
    4. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2015. "In search of robust methods for dynamic panel data models in empirical corporate finance," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 84-98.
    5. Chaitat Jirophat & Pym Manopimoke & Suparit Suwanik, 2022. "The Macroeconomic Effects of Climate Shocks in Thailand," PIER Discussion Papers 188, Puey Ungphakorn Institute for Economic Research.
    6. Donia Aloui & Brahim Gaies & Rafla Hchaichi, 2023. "Exploring environmental degradation spillovers in Sub-Saharan Africa: the energy–financial instability nexus," Economic Change and Restructuring, Springer, vol. 56(3), pages 1699-1724, June.
    7. Abonazel, Mohamed R., 2016. "Bias Correction Methods for Dynamic Panel Data Models with Fixed Effects," MPRA Paper 70628, University Library of Munich, Germany.
    8. Mahir Binici & Yin-Wong Cheung & Kon S. Lai, 2011. "Trade Openness, Market Competition, and Inflation: Some Sectoral Evidence from OECD Countries," CESifo Working Paper Series 3690, CESifo.
    9. Andrés Rodríguez-Pose, 2012. "Trade and Regional Inequality," Economic Geography, Taylor & Francis Journals, vol. 88(2), pages 109-136, April.
    10. Garita, Gus, 2009. "How Does Financial Openness Affect Economic Growth and its Components?," MPRA Paper 20099, University Library of Munich, Germany.
    11. Gehringer, Agnieszka & Prettner, Klaus, 2019. "Longevity And Technological Change," Macroeconomic Dynamics, Cambridge University Press, vol. 23(4), pages 1471-1503, June.
    12. Seungho Lee & Md Zahangir Alam, 2024. "The impact of climate risk on bank profitability through liquidity creation channel: empirical evidence from G7 countries," Journal of Asset Management, Palgrave Macmillan, vol. 25(7), pages 726-739, December.
    13. Yongfu Huang & Jingjing He & Finn Tarp, 2012. "Is the Clean Development Mechanism Effective for Emission Reductions?," WIDER Working Paper Series wp-2012-073, World Institute for Development Economic Research (UNU-WIDER).
    14. Alexander Chudik & M. Hashem Pesaran, 2017. "A Bias-Corrected Method of Moments Approach to Estimation of Dynamic Short-T Panels," CESifo Working Paper Series 6688, CESifo.
    15. Dosi, G. & Piva, M. & Virgillito, M.E. & Vivarelli, M., 2021. "Embodied and disembodied technological change: The sectoral patterns of job-creation and job-destruction," Research Policy, Elsevier, vol. 50(4).
    16. Armey, Laura E. & McNab, Robert M., 2018. "Expenditure decentralization and natural resources," The Quarterly Review of Economics and Finance, Elsevier, vol. 70(C), pages 52-61.
    17. Mali Chivakul & Bernhard Kassner, 2019. "Can Consumption Growth in China Keep Up as Investment Slows?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 381-412, September.
    18. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    19. Arnone, Massimo & Leogrande, Angelo, 2024. "The Green Trilemma: Energy Efficiency, Banking Stability and Climate Risk in the ESG Context at World Level," MPRA Paper 121169, University Library of Munich, Germany.
    20. Jochimsen, Beate & Thomasius, Sebastian, 2014. "The perfect finance minister: Whom to appoint as finance minister to balance the budget," European Journal of Political Economy, Elsevier, vol. 34(C), pages 390-408.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:climat:v:177:y:2024:i:10:d:10.1007_s10584-024-03814-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.