This Changes Everything: Climate Shocks and Sovereign Bonds

25 Pages Posted: 23 Jul 2020

See all articles by Serhan Cevik

Serhan Cevik

International Monetary Fund (IMF)

João Tovar Jalles

International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Date Written: June 1, 2020

Abstract

Climate change is already a systemic risk to the global economy. While there is a large body of literature documenting potential economic consequences, there is scarce research on the link between climate change and sovereign risk. This paper therefore investigates the impact of climate change vulnerability and resilience on sovereign bond yields and spreads in 98 advanced and developing countries over the period 1995-2017. We find that the vulnerability and resilience to climate change have a significant impact on the cost government borrowing, after controlling for conventional determinants of sovereign risk. That is, countries that are more resilient to climate change have lower bond yields and spreads relative to countries with greater vulnerability to risks associated with climate change. Furthermore, partitioning the sample into country groups reveals that the magnitude and statistical significance of these effects are much greater in developing countries with weaker capacity to adapt to and mitigate the consequences of climate change.

JEL Classification: C23, C83, E30, E43, F41, G15, H60, E01, G12, C, F16, L31

Suggested Citation

Cevik, Serhan and Jalles, João Tovar, This Changes Everything: Climate Shocks and Sovereign Bonds (June 1, 2020). IMF Working Paper No. 20/79, Available at SSRN: https://ssrn.com/abstract=3652499

Serhan Cevik (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

João Tovar Jalles

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

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