Date of This Version

8-7-2025

Abstract

This paper examines the macro-financial effects of alternative adaptation strategies in response to exogenous shocks in labor productivity caused by climate change. Using a Stock-Flow-Consistent Agent-Based model calibrated to U.S. data, we analyze two main scenarios: (i) a change in the conduct of monetary policy to account for climate-related damages, and (ii) a firm-level adaptation strategy that internalizes expected climate losses. We evaluate both scenarios under the assumption of either homogeneous or heterogeneous climate shocks. Our results indicate that both strategies can mitigate the adverse effects of climate change on output and wealth distribution. However, their performance is significantly worse in the presence of heterogeneous climate shocks, which also lead to a persistent increase in firms’ leverage. Moreover, while firm-level adaptation relies primarily on internal resources, monetary policy adjustments increase firms’ dependence on external debt financing, underscoring the need for closer monitoring of financial stability in such circumstances.

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