Research Spotlight: Adapting Sovereign Debt to Climate Change

As stronger hurricanes become more common due to climate change, understanding what factors drive recovery is increasingly important. How quickly a country recovers is influenced by its ability to attract foreign capital — making recovery challenging for emerging economies, as investors are more reluctant to invest in countries that are more likely to default on loans. The challenge for these countries to secure capital suggests an area for financial instruments to be adapted to better suit their needs. To gain a clearer understanding of the interplay between climate-related disasters and these financial challenges, Richmond Fed economists Toan Phan and Felipe Schwartzman created a model to quantify the welfare implications of a change in disaster risks and the benefits of financial adaptation strategies.