Heat Shocks and Agricultural Loan Repayment

Although the large and widespread impacts that climate change will have on the economy have been extensively documented, the factors determining the extent of these damages to the financial system are less understood. In this paper, we exploit the exogenous variation in heat shocks to estimate their effect on loan repayment for a sector that is both highly heat-sensitive and reliant on credit—agriculture. We find no evidence that one-year heat shocks lead to a change in delinquency rates, while persistent heat shocks lasting two or three years have a statistically significant, but economically small, effect, with a uniform 1◦C temperature increase changing delinquency rates by approximately 2.9–3.4% of their within-sample standard deviation. We validate these results by systematically ruling out aggregation bias, data-construction errors, and attenuation bias as explanations for our findings. These results suggest the important role that robust buffering mechanisms and lender forbearance play in minimizing the transmission of climate-related physical risk to the financial sector.