The Effects of Weather Shocks on Economic Activity: What are the Channels of Impact?

Global temperatures have increased at a historically unprecedented pace. This paper finds that the negative effect of temperature on output in countries with hot climates runs through reduced investment, depressed labor productivity, poorer human health, and lower agricultural and industrial output. We find that hot low-income countries suffer the largest costs. In a median low-income country, aggregate output is about 2 percent lower and investment is about 10 percent lower seven years after a 1 degree increase in average annual temperature. We also find that economic development, in general, helps to shield countries from temperature shocks, with hot regions in high-income countries on average sustaining less economic damage from rising temperatures than hot regions in low-income countries.