← Search

Journal of Banking & Finance Vol. 152 2023

Compounding COVID-19 and climate risks: The interplay of banks’ lending and government’s policy in the shock recovery

Nepomuk Dunz1,2; Arthur Hrast Essenfelder; Andrea Mazzocchetti3; Irene Monasterolo4,1,5; Marco Raberto6

1 Vienna University of Economics and Business · 2 World Bank · 3 Ca' Foscari University of Venice · 4 Center for Global Development · 5 Boston University · 6 University of Genoa

open access

Abstract

We assess the individual and compounding impacts of COVID-19 and climate physical risks in the economy and finance, using the EIRIN Stock-Flow Consistent model. We study the interplay between banks' lending decisions and government's policy effectiveness in the economic recovery process. We calibrate EIRIN on Mexico, being a country highly exposed to COVID-19 and hurricanes risks. By embedding financial actors and the credit market, and by endogenising investors' expectations, EIRIN analyses the finance-economy feedbacks, providing an accurate assessment of risks and policy co-benefits. We quantify the impacts of compounding COVID-19 and hurricanes on GDP through time using a compound risk indicator. We find that procyclical lending and credit market constraints amplify the initial shocks by limiting firms' recovery investments, thus mining the effectiveness of higher government spending. When COVID-19 and hurricanes compound, non-linear dynamics that amplify losses emerge, negatively affecting the economic recovery, banks' financial stability and public debt sustainability.

DOI
10.1016/j.jbankfin.2021.106306
Volume
152
Pages
106306
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite