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Climate Change and Sovereign Risk: A Regional Analysis for the Caribbean

Author

Listed:
  • Agarwala, Matthew
  • Burke, Matt
  • Doherty-Bigara, Jennifer
  • Klusak, Patrycja
  • Mohaddes, Kamiar

Abstract

Climate change is an existential threat to the world economy, with complex, evolving and nonlinear dynamics that remain a source of great uncertainty. There is a bourgeoning literature on the economic impact of climate change, but research on how climate change affects sovereign risks is limited. This paper provides forward-looking regional analysis of the effects of climate change on sovereign creditworthiness, probability of default and the cost of borrowing for the Caribbean economies. Our results indicate that there is substantial variation in the sensitivity of ratings to climate change across the region which is due to the non-linear nature of ratings. Our findings improve the identification and management of sovereign climate risk and provides a forward-looking assessment of how climate change could affect the cost of accessing international finance. As such, it leads to a suite of policy options for countries in the region.

Suggested Citation

  • Agarwala, Matthew & Burke, Matt & Doherty-Bigara, Jennifer & Klusak, Patrycja & Mohaddes, Kamiar, 2024. "Climate Change and Sovereign Risk: A Regional Analysis for the Caribbean," IDB Publications (Working Papers) 13478, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:13478
    DOI: http://dx.doi.org/10.18235/0012885
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    References listed on IDEAS

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    More about this item

    Keywords

    Sovereign credit rating; climate change; counterfactual analysis; climate-economy models; sovereign debt; physical risks; Fiscal policy; transition risks; Latin America; Caribbean.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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