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Weather Shocks

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Abstract

How much do weather shocks matter? The literature addresses this question in two isolated ways: either by looking at long-term effects through the prism of theoretical models, or by focusing on short-term effects using empirical analysis. We propose a framework to bring together both the short and long-term effects through the lens of an estimated DSGE model with a weather-dependent agricultural sector. The model is estimated using Bayesian methods and quarterly data for New Zealand using the weather as an observable variable. In the short-run, our analysis underlines the key role of weather as a driver of business cycles over the sample period. An adverse weather shock generates a recession, boosts the non-agricultural sector and entails a domestic currency depreciation. Taking a long-term perspective, a welfare analysis reveals that weather shocks are not a free lunch: the welfare cost of weather is currently estimated at 0.19% of permanent consumption. Climate change critically increases the variability of key macroeconomic variables (such as GDP, agricultural output or the real exchange rate) resulting in a higher welfare cost peaking to 0.29% in the worst case scenario.

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  • Ewen Gallic & Gauthier Vermandel, 2019. "Weather Shocks," AMSE Working Papers 1915, Aix-Marseille School of Economics, France.
  • Handle: RePEc:aim:wpaimx:1915
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    Cited by:

    1. Monica Billio & Roberto Casarin & Enrica De Cian & Malcolm Mistry & Anthony Osuntuyi, 2020. "The impact of Climate on Economic and Financial Cycles: A Markov-switching Panel Approach," Papers 2012.14693, arXiv.org.
    2. Stefan Mittnik & Willi Semmler & Alexander Haider, 2020. "Climate Disaster Risks—Empirics and a Multi-Phase Dynamic Model," Econometrics, MDPI, vol. 8(3), pages 1-27, August.
    3. Marcelo Arbex & Michael Batu, 2017. "Weather, Climate and the Economy: Welfare Implications of Temperature Shocks," Working Papers 1707, University of Windsor, Department of Economics.
    4. Chen, Chuanqi & Pan, Dongyang, 2020. "The Optimal Mix of Monetary and Climate Policy," MPRA Paper 97718, University Library of Munich, Germany.
    5. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    6. Eszter Boros, 2020. "Risks of Climate Change and Credit Institution Stress Tests," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(4), pages 107-131.
    7. De Bandt Olivier, & Jacolin Luc, & Lemaire Thibault., 2021. "Climate Change in Developing Countries: Global Warming Effects,Transmission Channels and Adaptation Policies," Working papers 822, Banque de France.

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    More about this item

    Keywords

    agriculture; business cycles; climate change; weather shocks;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: 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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