Acute physical risks are becoming increasingly frequent and intense, with future climate scenarios suggesting further escalation. These events can generate severe and potentially persistent economic losses, while placing growing pressure on public finances through rising disaster response and recovery expenditures. Yet, macroeconomic models often fall short in consistently capturing the economic and fiscal impacts of physical climate risks. In particular, they tend to overlook critical shock transmission channels and the full implications of extreme weather events, resulting in an incomplete picture of disaster-related losses and recovery needs. This, in turn, limits our ability to assess the climate insurance protection gap and to design effective and financially viable public policy responses. To help close this gap, we adapt and extend EIRIN, a macro-financial Stock-Flow Consistent (SFC) model of an open economy, tailored at the national level. EIRIN features a limited number of heterogeneous agents across the real and financial sectors, which are integrated through a network of interlinked balance sheet positions grounded in real-world data, and governed by bounded rationality. This framework allows us to examine how climate tail risks, in conjunction with fiscal and credit constraints, can trigger persistent macroeconomic disruptions. We apply the model to Italy, a country particularly vulnerable to natural disasters, fiscal fragilities, and high public debt. Our findings show that extreme weather events causing a 15% destruction in firms’ capital stock, combined with constrained credit conditions, can lead to deep and prolonged declines in GDP growth and a significant rise in public debt. These adverse effects are further exacerbated in the absence of targeted adaptation strategies and climate-aligned financial policies.

Keywords: Climate tail risk; Shock persistence; Public debt; Credit constraints; Economic recovery; Stock-Flow Consistent model