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High Temperature Shocks are Supply Shocks. Evidence from One Century of Monthly Data

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  • Baleyte, Jules
  • Bazot, Guillaume
  • Monnet, Eric
  • Morys, Matthias

Abstract

Are temporary high-temperature anomalies supply or demand shocks? And how do central banks respond to them? We investigate these questions with a new historical dataset covering 14 European countries over a full century and accounting for nonlinearities via state-dependent impulse response functions in the vein of Auerbach and Gorodnichenko (2012). The following stylized facts emerge: 1) a high temperature shock is a negative supply shock (lower output growth and higher inflation); 2) the impact is usually less pronounced - but more persistent - on inflation than on output; 3) central banks have responded to these shocks by lowering their interest rate; 4) the macroeconomic impact of individual high temperature shocks on inflation has diminished over time, but the frequency of these shocks has increased.

Suggested Citation

  • Baleyte, Jules & Bazot, Guillaume & Monnet, Eric & Morys, Matthias, 2024. "High Temperature Shocks are Supply Shocks. Evidence from One Century of Monthly Data," CEPR Discussion Papers 19682, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19682
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    File URL: https://cepr.org/publications/DP19682
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