Natural Disasters, Climate Change, and Sovereign Risk
25 Pages Posted: 23 Jul 2020
Date Written: July, 2020
I investigate how natural disaster 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 government's ability to issue debt and that climate change may further restrict market access. Next, I show that "disaster clauses", that provide debt-servicing relief, improve government ability to borrow and mitigate the adverse impact of climate change on government's borrowing conditions.
JEL Classification: F32, F34, Q54
Suggested Citation: Suggested Citation