The Transmission of Climate Shocks to Financial Risk in Morocco: A Macro-Financial Perspective Using Bayesian VAR Modeling

Abstract

Global warming reached unprecedented levels in 2024 since records began in 1850, suggesting that climate change is worsening. This article considers the impact of climate shocks on the real economy and financial stability, particularly focusing on temperature and precipitation variations. We assess climate change by estimating a Bayesian Vector Autoregression (BVAR) for the period 2007Q1–2022Q1 and examining the dynamic responses of GDP and non-performing loans (NPLs) to it. Our results indicate that precipitation shocks positively affect economic activity, while temperature shocks have adverse and damaging effects on both economic production and the financial sector. We find evidence of and suggest an indirect transmission channel between climate and financial risk through GDP. Our findings clearly indicate the need for climate dynamics to be modeled in macroeconomic and financial models to appropriately capture the risks associated with climate variability.