Climate change, international finance and the balance-of-payments. A proposal for two novel indices

This paper examines how physical and transition climate hazards affect balance-of-payments of countries in the Global South. It develops two theory-based indices capturing the exposure of current and financial accounts to climate risks. This is an important endeavour because balance-of-payments constraints shape macroeconomic policy space in low- and middle-income countries due to the latter's asymmetric integration into the international monetary system. Reduced policy space attenuates countries' development prospects towards more resilience to external shocks, their capacities to conduct climate adaptation and mitigation measures, and perpetuates global asymmetries. The paper contributes to ecological macroeconomics by integrating climate risk metrics with a balance-of-payments perspective. Existing indices typically assess either physical or transition risks, or focus on external financial fragility without incorporating climate hazards. In contrast, the proposed indices jointly capture both dimensions while embedding them in countries' structural macroeconomic conditions. Though the focus is on Global South countries, the identified vulnerabilities are likely to also propagate to the Global North as they pose risks to financial stability and global economic prosperity which depend on well-functioning Global Value Chains and outlet markets. The indices aim to serve as toolkit to assess macroeconomic vulnerability to support more effective policy and reform efforts.