Authors : Apaka Rangita; Aaron Kemei

Volume/Issue : Volume 11 - 2026, Issue 6 - June

Google Scholar : https://tinyurl.com/52fhtwmx

Scribd : https://tinyurl.com/yc48bx99

DOI : https://doi.org/10.38124/ijisrt/26jun1378

Note : A published paper may take 4-5 working days from the publication date to appear in PlumX Metrics, Semantic Scholar, and ResearchGate.

Abstract : This paper investigates the impact of climate risk on optimal sovereign debt ceilings in emerging economies. Extending the stochastic debt management framework of Brachetta and Ceci (2022), public debt is modeled as a controlled geometric Brownian motion in which climate change affects debt accumulation through scenario-dependent adjustments to economic growth, fiscal pressure, and macroeconomic volatility. The government’s debt management problem is formulated as an infinite-horizon stochastic optimal control problem and solved through the Hamilton–Jacobi–Bellman equation. The resulting free-boundary problem yields an endogenous debt ceiling representing the optimal threshold at which fiscal intervention becomes active. Climate risk is incorporated using the Network for Greening the Financial System (NGFS) climate scenarios, including Orderly Transition, Disorderly Transition, and Hot House World pathways. Numerical results demonstrate how worsening climate conditions reduce sustainable borrowing capacity and necessitate earlier fiscal adjustment. The findings provide a quantitative framework for climate-resilient debt management in emerging economies.

Keywords : Sovereign Debt, Climate Risk, Stochastic Control, HJB Equation, Debt Sustainability, NGFS Scenarios.

References :

1. African Development Bank. (2022). African Economic Outlook 2022: Supporting Climate Resilience and a Just Energy Transition in Africa. Abidjan: African Development Bank Group.
2. Batini, N., Eyraud, L., Forni, L., & Weber, A. (2014). Fiscal multipliers: Size, determinants, and use in macroeconomic projections. IMF Technical Notes and Manuals 14/02.
3. Brachetta, M., & Ceci, C. (2022). A stochastic control approach to public debt management. Mathematics and Financial Economics, 16(2), 255–289.
4. Cadenillas, A., & Aguilar, R. (2015). Optimal debt management with stochastic interest rates. Journal of Economic Dynamics and Control, 59, 1–25.
5. Ferrari, G., & Ferrari, V. (2023). On the optimal management of public debt: A singular stochastic control approach. SIAM Journal on Control and Optimization, 61(3), 1455–1480.
6. Ilzetzki, E., Mendoza, E. G., & V´egh, C. A. (2013). How big (small?) are fiscal multipliers? Journal of Monetary Economics, 60(2), 239–254.
7. International Monetary Fund (IMF). (2021). Fiscal Monitor: A Fair Shot. Washington,DC:International Monetary Fund.
8. Kling, G., Volz, U., & Zeng, Y. (2023). Climate change and sovereign debt sustainability in emerging economies. Energy Economics, 118, 106–124.
9. Lamperti, F., Dosi, G., Napoletano, M., Roventini, A., & Sapio, A. (2021). Climate change and green transitions in an agent-based integrated assessment model.Technological Forecasting and Social Change, 163, 120461.
10. Monasterolo, I., Roventini, A., & Foxon, T. J. (2021). Uncertainty of climate policies and implications for economics and finance: An evolutionary economics approach. Ecological Economics, 180, 106882.
11. Network for Greening the Financial System (NGFS). (2022). NGFS Climate Scenarios for Central Banks and Supervisors – Phase III. Paris: NGFS.
12. Network for Greening the Financial System (NGFS). (2024). NGFS Climate Scenarios– Phase V. Paris: NGFS.
13. Volz, U. (2022). Climate change and sovereign debt: What role for central banks?London: SOAS University of London.