Summary:
In the context of global warming, the impact of frequent occurrences of extreme weather on the high-quality development of the real economy and the steady operation of the financial market has increasingly intensified. With the orderly construction of a unified national market and the increasingly close interregional circulation of commodities and factors, an in-depth investigation of the economic impact of extreme weather events has become a critical issue for China. This research has reference value for China in terms of assisting it to cope with downward economic pressure, prevent the adverse spatial spillover effects caused by extreme weather risks, enhance its ability to tackle climate change, and accelerate the construction of an interprovincial joint prevention and control mechanism for extreme weather risks under the national unified market. Although numerous studies examine the specific impacts of climate change-related risks on China's real economy and financial institutions, the literature mainly focuses on the long-term impacts of climate risks, with little research on the short-term effects on business cycle fluctuations. This paper contributes to the literature in three aspects. First, it innovatively combines network topology analysis with extreme weather risks and portrays the network connectedness that characterizes provincial level extreme weather risks in China. Second, it comprehensively explores the impacts of provincial level extreme weather risks on China's macroeconomic fluctuations from the dual perspectives of network connectedness and spatial spillovers, including both aggregate level and provincial level analyses. Third, this paper discusses demand and the financial channels of the effects from the perspectives of both the real economy and the financial system, and conducts regional heterogeneity analyses. Following the construction of the Actuaries Climate Index developed by actuarial associations in the United States and Canada, we construct a province level and national level extreme weather index (EWI) in China using the Chinese surface climate daily data (V3.0) published by the China Meteorological Data Service Center. Regarding network correlation, this paper estimates a vector autoregressive model based on elastic network technology to measure the degree of network connectedness of the EWI in each province, and analyzes the specific impact of this degree of connectedness on the aggregate level macroeconomic fluctuations. Next, this paper uses the spatial Durbin model to examine the spatial spillover effects between extreme weather risks in each province, with a focus on meso level analysis. The findings of this paper are as follows: (1) the provincial level network connectedness of the EWI has increased significantly since 2012; (2) the enhancement of the network connectedness of the interprovincial EWI will compress consumption and investment and hence reduce aggregate demand, increase financial stress, and generate a persistent decline of aggregate output; (3) the increase of the EWI in one province will also affect the real economy of other provinces through spatial spillover effects, repressing real economic activities such as consumption and investment in other provinces through the demand channel, as well as leading to a decline in other provinces' bank credit through the financial channel. We find that there is regional heterogeneity in the spatial spillover effects of the EWI. With the weakening of interprovincial market segmentation, the spatial spillover effects of the EWI will be significantly enhanced. The conclusions of this paper elucidate the need and directions for the development of extreme weather adaptation policies and preventive measures in various regions. First, China should strengthen its prevention of extreme weather risks; increase its monitoring and early warning systems for extreme weather events; avoid continuous negative impacts of extreme weather risks on the real economy; fully consider extreme weather risks in urban planning, construction, and operation; and accelerate the construction of climate change-adaptive cities to enhance the resilience of the urban economic system. Second, China should pay attention to the impact of extreme weather risks on its financial system, guard against the rise of financial risk and financial pressure caused by extreme weather shocks, and actively prevent the “ratchet effect” of extreme weather risk caused by an insufficiency of domestic demand and the volatility of the financial market. Third, China should promote and enable interprovincial and interregional joint actions to deal with extreme weather risks and thus effectively avoid the interregional contagion of extreme weather risks and to enable provinces and regions to jointly curb the adverse spatial spillover effects caused by extreme weather risks on real economic activities.
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