From skies to markets: implications of extreme weather events for macroeconomic and financial imbalances in CESEE countries

This study explores the heterogeneous and asymmetric macro-financial effects of weather-related shocks in Central, Eastern and Southeastern European countries, depending on the level of underlying macro-financial vulnerabilities. Focusing solely on acute physical risks – those arising from extreme weather events – it employs panel quantile regression analysis to examine data from 2000Q1–2022Q4 for 17 countries in the region. Notably, we find that weather shocks – particularly droughts, floods, heatwaves and wildfires – exacerbate macroeconomic and financial imbalances, increasing the susceptibility of already vulnerable economies to additional risks. Specifically, countries with higher economic imbalances suffer more severe output disruptions and heightened inflationary pressures following a weather shock. While the immediate impact of climate shocks on external imbalances is limited, countries with existing vulnerabilities may still encounter longer-term pressures on trade and investment patterns. Additionally, extreme weather events can intensify financial vulnerabilities for countries that are already grappling with lower levels of financial resilience.