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The effects of climate risks on economic activity in a panel of US states: The role of uncertainty

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  • Sheng, Xin
  • Gupta, Rangan
  • Çepni, Oğuzhan

Abstract

We analyse the impact of climate risks (temperature growth and its volatility) on the coincident indicator of the 50 US states in a panel data set-up, over the monthly period of March, 1984 to December, 2019. Using impulse response functions (IRFs) from a linear local projections (LPs) model, we show that climate risks negatively impact economic activity to a similar degree, irrespective of whether such risks are due to changes in temperature growth or its volatility. More importantly, using a nonlinear LPs model, the IRFs reveal that the adverse effect of climate risks is contingent on the regimes of economic and policy-related uncertainty of the states, with the impact being significantly much stronger under relatively higher values of uncertainty, rather than lower values of the same. In addition to this, temperature growth volatility is found to contract economic activity nearly five times more compared to when temperature growth increases by a similar magnitude in the higher uncertainty-based regime of the nonlinear model. Understandably, our results have important policy implications.

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  • Sheng, Xin & Gupta, Rangan & Çepni, Oğuzhan, 2022. "The effects of climate risks on economic activity in a panel of US states: The role of uncertainty," Economics Letters, Elsevier, vol. 213(C).
    • Handle: RePEc:eee:ecolet:v:213:y:2022:i:c:s0165176522000568
    DOI: 10.1016/j.econlet.2022.110374
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    Cited by:

    1. Nicholas Ngepah & Charles Raoul Tchuinkam Djemo & Charles Shaaba Saba, 2022. "Forecasting the Economic Growth Impacts of Climate Change in South Africa in the 2030 and 2050 Horizons," Sustainability, MDPI, vol. 14(14), pages 1-18, July.
    2. Gupta, Rangan & Nel, Jacobus & Salisu, Afees A. & Ji, Qiang, 2023. "Predictability of economic slowdowns in advanced countries over eight centuries: The role of climate risks," Finance Research Letters, Elsevier, vol. 54(C).
    3. Bonato, Matteo & Cepni, Oguzhan & Gupta, Rangan & Pierdzioch, Christian, 2023. "Climate risks and state-level stock market realized volatility," Journal of Financial Markets, Elsevier, vol. 66(C).
    4. Angelidis, Timotheos & Sakkas, Athanasios & Spiliotopoulos, George, 2023. "Climate uncertainty and marginal climate capital needs," Finance Research Letters, Elsevier, vol. 56(C).
    5. Karim, Sitara & Naeem, Muhammad Abubakr & Shafiullah, Muhammad & Lucey, Brian M. & Ashraf, Sania, 2023. "Asymmetric relationship between climate policy uncertainty and energy metals: Evidence from cross-quantilogram," Finance Research Letters, Elsevier, vol. 54(C).
    6. Afees Salisu & Tirimisiyu Oloko, 2023. "Climate Risk Measures - A Review," Asian Economics Letters, Asia-Pacific Applied Economics Association, vol. 4(1), pages 1-4.
    7. Lee, Chien-Chiang & Wang, Chih-Wei & Thinh, Bui Tien, 2023. "Green development, climate risks, and cash flow: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    8. Cepni, Oguzhan & Christou, Christina & Gupta, Rangan, 2023. "Forecasting national recessions of the United States with state-level climate risks: Evidence from model averaging in Markov-switching models," Economics Letters, Elsevier, vol. 227(C).
    9. Ren, Xiaohang & Li, Jingyao & He, Feng & Lucey, Brian, 2023. "Impact of climate policy uncertainty on traditional energy and green markets: Evidence from time-varying granger tests," Renewable and Sustainable Energy Reviews, Elsevier, vol. 173(C).
    10. Matteo Bonato & Oguzhan Cepni & Rangan Gupta & Christian Pierdzioch, 2024. "Business applications and state‐level stock market realized volatility: A forecasting experiment," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(2), pages 456-472, March.
    11. Oguzhan Cepni & Rangan Gupta & Wenting Liao & Jun Ma, 2024. "Climate risks and forecastability of the weekly state‐level economic conditions of the United States," International Review of Finance, International Review of Finance Ltd., vol. 24(1), pages 154-162, March.
    12. Rilwan Sakariyahu & Olayinka Oyekola & Rasheed Adigun & Temitope Fagbemi & Oluwagbenga Seyingbo & Rodiat Lawal, 2023. "Heterogeneous and time varying nexus between climate change and quality of life in Africa," Discussion Papers 2308, University of Exeter, Department of Economics.
    13. Xin Sheng & Rangan Gupta & Oguzhan Cepni, 2023. "Time-Varying Effects of Extreme Weather Shocks on Output Growth of the United States," Working Papers 202324, University of Pretoria, Department of Economics.
    14. Rangan Gupta & Sarah Nandnaba & Wei Jiang, 2024. "Climate Change and Growth Dynamics," Working Papers 202404, University of Pretoria, Department of Economics.
    15. Lin, Boqiang & Zhao, Hengsong, 2023. "Tracking policy uncertainty under climate change," Resources Policy, Elsevier, vol. 83(C).
    16. Wenting Liao & Xin Sheng & Rangan Gupta & Sayar Karmakar, 2024. "Extreme Weather Shocks and State-Level Inflation of the United States," Working Papers 202402, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Climate risks; Uncertainty; Economic activity; US states; Linear and nonlinear local projections; Impulse response functions;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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