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Temperature and the U.S. Economy: From Demand to Supply-Side Effects?

Author

Listed:
  • Marta Garcia-Rodriguez

    (Bank of Spain)

  • Roman Horvath

    (Institute of Economic Studies, Charles University)

  • Clemente Pinilla-Torremocha

    (Bank of England and European Research University-ERC-London)

Abstract

We examine how the macroeconomic effects of temperature shocks have evolved in the United States since 1947. Using a time-varying parameter vector autoregression with stochastic volatility estimated on monthly data, we document a structural shift in the propagation of temperature shocks. Before the 1980s, higher temperatures induced demand-like dynamics—output and prices rose together. Since the 1980s, responses have become supply-like: real activity declines persistently while prices rise on impact and turn negative thereafter. A sectoral decomposition confirms shifts in agriculture, manufacturing, and services, with the services sector the primary driver of recent GDP dynamics. Our results reveal that food, services, and energy prices drive most of the aggregate price adjustments, while core prices remain muted. Temperature shocks now explain a rising share of medium-run output and price variation, and greater ex-ante temperature uncertainty depresses equity valuations on impact. Overall, temperature shocks have become increasingly contractionary and inflationary in nature.

Suggested Citation

  • Marta Garcia-Rodriguez & Roman Horvath & Clemente Pinilla-Torremocha, 2025. "Temperature and the U.S. Economy: From Demand to Supply-Side Effects?," Working Papers IES 2025/21, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2025.
    • Handle: RePEc:fau:wpaper:wp2025_21
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    File URL: https://ies.fsv.cuni.cz/en/temperature-and-us-economy-demand-supply-side-effects
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • 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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