Title: The macroeconomic and financial impact of compounding COVID-19,climate change and financial risks
Authors: Irene Monasterolo - Vienna University (Austria) [presenting]
Abstract: The COVID19 crisis has been treated as a public health issue with short-term economic and financial repercussions. This approach neglects the compounding of COVID19 with other main sources of risks in our society, climate change and finance. Neglecting compound risk could lead to underestimating losses, and induce unnecessary trade-offs between investing in the COVID19 recovery or climate change mitigation. We apply the EIRIN Stock Flow Consistent behavioural model to quantitatively assess the direct and indirect impacts of compounding COVID-19, climate and financial risk. The model allows considering the implications of risk uncertainty and system complexity on agents access to information, inter-temporal preferences, the formation of expectations and decision making. We apply and calibrate the model on Mexico and analyse the implications of compound risk on GDP, unemployment, private investment, fiscal impacts (e.g., expenditure, revenue, fiscal space) and impacts on households assets and inequality. The results show that risk compounding could amplify losses by triggering reinforcing feedbacks and non-linearities in the economy that in turn lead to hysteresis. Further, timely and targeted public spending plays a main role to mitigate the short term economic impacts of the shocks, by signalling both domestic demand and supply, and affecting agents expectations.