Stress Testing the Global Economy to Climate Change-Related Shocks in Large and Interconnected Economies

33 Pages Posted: 4 Oct 2022

See all articles by Yeu Jin Jung

Yeu Jin Jung

Independent

Camilo E. Tovar

International Monetary Fund

Yiqun Wu

International Monetary Fund (IMF)

Tianxiao Zheng

International Monetary Fund (IMF)

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

Suggested Citation

Jung, Yeu Jin and Tovar, Camilo E. and Wu, Yiqun and Zheng, Tianxiao, Stress Testing the Global Economy to Climate Change-Related Shocks in Large and Interconnected Economies (September 1, 2022). IMF Working Paper No. 2022/189, Available at SSRN: https://ssrn.com/abstract=4234378

Yeu Jin Jung

Independent ( email )

Camilo E. Tovar (Contact Author)

International Monetary Fund ( email )

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

HOME PAGE: http://blog-imfdirect.imf.org/bloggers/camilo-e-tovar/

Yiqun Wu

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Tianxiao Zheng

International Monetary Fund (IMF) ( email )

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

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