In our new working paper, written with John Beirne, Donghyun Park, and Gazi Salah Uddin, we find that political stability together with financial development matter for the negative impact of climate risks on fiscal space (higher bond yields and lower sovereign ratings for foreign currency debt at the horizon of two years).
In particular, we find that lower risks of religious tensions preserve fiscal space in the wake of climate risk shocks. Religious tensions are defined in the ICRG dataset (PRS group) and range from 0 (worst) to 6 (best):
“Religious tensions may stem from the domination of society and/or governance by a single religious group that seeks to replace civil law by religious law and to exclude other religions from the political and/or social process; the desire of a single religious group to dominate governance; the suppression of religious freedom; the desire of a religious group to express its own identity, separate from the country as a whole.
The risk involved in these situations ranges from inexperienced people imposing inappropriate policies through civil dissent to civil war.”
I made a heat plot for the lower decile (higher risks) of religious tension risks:
Below, I reproduce the result in the paper. Lower risks of religious tensions preserve fiscal space in the wake of climate risk shocks:
The new JEL article by Becker, Rubin, and Woessman may help to think about new macroeconomic mechanisms climate-fiscal space nexus in the context of high risks of religious tensions.
Becker, Sascha O., Jared Rubin, and Ludger Woessmann. 2024. “Religion and Growth.” Journal of Economic Literature, 62 (3): 1094–1142.DOI: 10.1257/jel.20231666.