Stress Testing the Global Economy to Climate Change-Related Shocks in Large and Interconnected Economies
33 Pages Posted: 4 Oct 2022
Date Written: September 1, 2022
Abstract
We stress test the global economy to extreme climate change-related shocks on large and interconnected economies. Our analysis (i) identifies large and interconnected economies vulnerable to climate change-related shocks; (ii) estimates these economies’ external financing needs-at-risk due to these shocks, and (iii) quantifies the spillovers to the global economy using a global network model. We show that large and interconnected economies vulnerable to climate change could trigger a drain of $1.8 trillion in international reserves (2 percent of 2019’s global GDP). Domestic and multilateral macroeconomic policies can help reduce these global lossess to about $0.8 trillion. The scenario highlights the importance of considering global spillovers when assessing the impact of climate change-related shocks.
Keywords: Climate change, external financing-needs-at-risk, multilayered networks, climate change vulnerability, vulnerability to climate change, climate vulnerability, climate change risk, CDS spread, Natural disasters, Stress testing, Climate policy, Global
JEL Classification: F34, F37, F41, F47, F60, F65, G15, G17, Q54, G28, Q58
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