Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico Dimitrios Laliotis and Sujan Lamichhane WP/23/175 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2023 AUG © 2023 International Monetary Fund WP/23/175 IMF Working Paper Monetary and Capital Markets Department Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico Prepared by Dimitrios Laliotis and Sujan Lamichhane Authorized for distribution by Hiroko Oura August 2023 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: This paper explores a novel forward-looking approach to study the financial stability implications of climate-related transition risks. We develop an integrated micro-macro framework with a new class of scenario called delayed-uncertain pathways. An additional stochastic financial modeling layer via a jump-diffusion process is considered to capture continuously changing risks, as well as the potential of large/sudden shocks in the financial markets. We applied this approach to study transition risks in the Mexican financial sector. But the implications are global in scope, and the framework is easily adaptable to other countries. We quantify the projections...
