NEW WORKING PAPER: We analyze the relationship between climate risk and fiscal space in a more systematic and rigorous way. To do so, we use panel local projections to examine the role of political stability and financial development in the relationship. For a sample of 199 economies in 1990-2022, we first empirically confirm that climate risks adversely affect fiscal space. We find that such effects are most pronounced for economies most vulnerable to climate change. However, our evidence indicates that political stability and financial development can mitigate such effects. We also identify nonlinearities in the climate risk-fiscal space nexus. More specifically, the impact of climate risk on fiscal space is greater when fiscal space is most constrained, i.e., at the upper quantile of the distribution. While fiscal consolidation is the key to mitigating the adverse effect of climate risks on fiscal space, our results suggest that both political stability and financial development can contribute as well.
You are welcome to download, share, or comment on the following working paper:
- John Beirne, Donghyun Park, Jamel Saadaoui, and Gazi Salah Uddin, Impact of Climate Risk on Fiscal Space: Does Political Stability and Financial Development Matter? (September 01, 2024). SSRN Working Paper 4943355.
