Vulnerability to Climate Change: Evidence from a Dynamic Factor Model

Using a dynamic factor model with stochastic volatility, we examine the synchronization of temperature and precipitation changes across countries and regions. By doing so, we analyze the implications for the medium-term economic outlook and vulnerability to climate risks. Our findings reveal that a common factor explains a significant portion of temperature variance globally, with the largest contribution observed in sub-Saharan Africa, Latin America, and Asia. Additionally, the com-mon factor accounts for the increase in temperature levels across these regions. In contrast, precipitation fluctuations exhibit more localized patterns. We find that countries with higher GDP per-capita tend to have lower exposure to global temperature changes.