CLIMATE RISK AND FINANCIAL STRESS IN ECOWAS

This paper analyses the causal relationship between climate risk and financial stress for ECOWAS economies over the period 2000-2019. We use the Multivariate Threshold Autoregressive Vector Model (MTVAR) to estimate this relationship. Our results suggest that there is an optimal temperature value, below and above which a vicious cycle exists between climate risk and financial stress. This evidence strongly supports the idea that the relationship between climate risk and financial stress is non-linear. It shows that 28.35°C is the optimal temperature level. Below this threshold, climate risk contributes less to financial stress, and the financial system in turn hinders global warming. Above 28.35°C, however, climate risk increases financial stress and the financial system contributes to global warming. Public and monetary authorities need to pay attention to the impact of climate risk on finance and the way it operates in ecological transitions.