Climate change and economic growth: evidence from a growth at risk model of Indonesia

This study aims to examine how climate change affects economic growth in Indonesia – the world’s largest Muslim-majority country with a dual banking system – by analyzing the distribution of future growth risks rather than average outcomes. The paper employs a Growth at Risk (GaR) framework, integrating climate variables into ordinary least sqaures and Quantile Regression models using quarterly data from 2008Q1 to 2023Q3. This approach allows the assessment of climate impacts across different states of the economic cycle and forecasting horizons. The results reveal a nonlinear and state-dependent relationship between climate change and economic growth. Climate change has its strongest and statistically significant effects at the lower tail of the growth distribution, where climate-induced fiscal stimulus supports economic recovery during downturns. The analysis is conducted at the national level and does not explicitly model differential transmission channels between Islamic and conventional banks, which could be explored in future research. The findings suggest that climate-responsive fiscal policy can play a stabilizing role during periods of economic weakness, particularly in dual-banking systems where risk-sharing financial structures may enhance resilience to climate shocks. By highlighting the role of fiscal responses and inclusive financial systems in mitigating climate-related downturns, the study informs policy strategies aimed at protecting livelihoods and supporting sustainable growth in climate-vulnerable, Muslim-majority economies. This study extends the GaR literature by incorporating climate change as a key predictor of growth risk and by contextualizing the analysis within a Muslim-majority, dual-banking economy, offering new insights into the interaction between climate shocks, fiscal policy and financial system structure.