In this paper, we study the local economic impacts of extreme weather events and the relationship between local financial structure and economic resilience towards such events. While most existing studies of the economic effects of natural hazards focus on spatially highly aggregated data, we utilize weather data that is collected at 0.5° x 0.5° grid cells to investigate the local economic effects of extreme wind speed and extreme precipitation events in 284 prefecture-level cities in China between 2004 and 2013. Specifically, we estimate impulse response functions for GDP per capita and employment using a bias-corrected method of moments estimator to capture the dynamic responses of affected cities up to five years after an event. We find that extreme precipitation events depress the growth of local GDP per capita for multiple years, while the negative effects of storms vanish after the first year. On impact, we do not find significant effects on employment growth in affected cities, but extreme precipitation events also reduce employment growth with a lag. We then use the results of our impulse response model to obtain a benchmark against which we measure the relative resilience of cities to extreme weather events. Regressions of economic resilience on local economic structure suggest that cities with higher levels of debt are less resilient, controlling for the intensity of the events. Contrary to findings on the Chinese finance-growth nexus in "normal" times, increased presence of state-owned commercial banks appears to be instrumental to regional recoverability in China. As extreme weather events are expected to become more frequent and severe due to climate change, our results can inform the emerging debate about regional economic resilience to weather-related shocks.
Local Finance and Economic Resilience During Extreme Weather Events [Under Review]
-- with Scott Langford, Mark Sanders, and Maryann Feldman
-- (an earlier version was circulated under the title: "George Bailey Meets the Tempestates: How Local Finance Strengthens Economic Resilience Through Extreme Weather Events")
The economic costs incurred by extreme weather events are substantial and increasing. In this study, we demonstrate how community banks – a type of financial institution with strong local ties and customer relationships – mitigate these costs at the local level. We use an event study model to demonstrate that US counties with higher community bank market shares experience fewer employment losses through extreme weather events. We then use bank-level analyses to demonstrate the mechanism – the small business credit supply. Community banks maintain their lending following extreme weather events, while other banks reduce it. These findings provide novel evidence on how local financial institutions strengthen economic resilience through extreme weather events. As policymakers develop strategies to mitigate the effects of extreme weather events, local finance may be a solution.
Lending in the Rain? A Review of the Impacts of Natural Hazard Shocks on Banks and the Finance-Resilience Nexus [Under Review]
-- SSRN Working Paper Version 4566028
Natural hazard shocks (such as natural disasters, extreme weather or climate events) have significant negative impacts on economic activity. This paper reviews the recent empirical literature on how banks are affected by such shocks, and how banks mediate the economic consequences to households and the real economy. After conceptualizing the theoretical transmission channels between the real economy and the banking sector, the review proceeds in two steps. First, it synthesises the existing literature on the direct effects of natural hazard shocks on bank stability, bank profitability, and credit supply. Then, the critical role of banking in economic recovery is analysed, including research on spillovers into unaffected regions through the banking system. Negative direct effects of natural hazard shocks on banks can be significant but are often transitory. Banking systems in less developed countries appear more vulnerable and are less able to maintain credit supply under adverse conditions. Banks that are better capitalised and that have incentives to support affected economies contribute to economic resilience. Several avenues for future research are identified, focusing on the specific characteristics and policy levers that enable the banking system to contribute to a resilient economy in the face of climate change and physical climate risks.
Work in Progress
SME Finance, Bank Relationships, and Extreme Weather Resilience in Europe
-- with Flavio de Carolis
Measuring Extreme Events
-- with Muji Jungbauer and Mark Sanders
Climate Shocks and Corporate Sustainability
-- with Jan-Philipp Ahrens and Melania Riefolo