Climate Disaster Risks - Empirics and a Multi-Phase Dynamic Model

Abstract

Recent research in financial economics has shown that rare large disasters have the potential to disrupt financial sectors via the destruction of capital stocks and jumps in risk premia. These disruptions often entail negative feedback effects on the macroeconomy. Research on disaster risks has also actively been pursued in the macroeconomic models of climate change. Our paper uses insights from the former work to study disaster risks in the macroeconomics of climate change and to spell out policy needs. Empirically the link between carbon dioxide emission and the frequency of climate related disaster is investigated using cross-sectional and panel data. The modeling part then uses a multi-phase dynamic macro model to explore this causal nexus and the effects of rare large disasters resulting in capital losses and rising risk premia. Our proposed multi-phase dynamic model, incorporating climate-related disaster shocks and their aftermath as one phase, is suitable for studying mitigation and adaptation policies.

Keywords: Real sector, Economic growth, Interest costs, Interest rates on loans, Low income countries, climate economics, disaster risk, macro feedbacks, multi-phase macro model, monetary and financial policies, environmental economics, premia, large disaster, GHG, public capital

JEL Classification: C61, Q54, Q58, H5, E01, G21, E62, G12, E52