Heterogeneity, Production Networks and the Economic Impact of Weather Shocks

This paper studies the macroeconomic implications of state and sector-specific sensitivity to weather fluctuations and interregional production networks in the United States. I build a general equilibrium model where the impact of weather fluctuations on productivity is state-sector dependent, and networks expose sectors to weather shocks from other regions through intermediate inputs. To quantify these mechanisms, I use annual data on sectoral GDP and weather by state from 1970 to 2019. My estimates show that models that do not consider these characteristics underestimate the aggregate impact of weather fluctuations by at least a factor of 3. In particular, when the whole economy faces an unexpected increase in temperature of 1 Celsius degree, the contraction in economic activity increases from -0.13 to -0.37 percent once heterogeneity is considered and -1.14 percent when networks are included.