The Effects of Weather Shocks on Economic Activity: What are the Channels of Impact?

Abstract

Global temperatures have increased at an unprecedented pace in the past 40 years. This paper finds that increases in temperature have uneven macroeconomic effects, with adverse consequences concentrated in countries with hot climates, such as most low-income countries. In these countries, a rise in temperature lowers per capita output, in both the short and medium term, through a wide array of channels: reduced agricultural output, suppressed productivity of workers exposed to heat, slower investment, and poorer health. In an unmitigated climate change scenario, and under very conservative assumptions, model simulations suggest the projected rise in temperature would imply a loss of around 9 percent of output for a representative low-income country by 2100.

Integrated perspective on translating biophysical to economic impacts of climate change

“…A robust observed relationship exists between changes in aggregate economic output (GDP per capita) and changes in regional temperatures. This relationship has been observed at multiple scales: global-national (6,7,(39)(40)(41), global-ADM1 (8), global-household (42), EU-national (43), USA-ADM1 (40,44), USA-ADM2 (45), USA-metro (43), Brazil-ADM1, and Indonesia-ADM1 (43). Main differences include the measure of temperature (level or change), the functional form (typically linear, polynomial or binned), and the inclusion of interaction terms and fixed effects.…”

Implications of Major Adverse Events on Productivity

“…Moreover, prolonged natural disasters can disrupt schooling, undermine learning conditions, and erode human capital through degraded work environments, sickness, etc. (Acevedo et al, 2018).…”

“…In addition, the impacts of natural disasters on productivity and output growth can also vary substantially across economic sectors (Loayza et al, 2012). Given the larger role of agricultural activity in LICs, weather events are likely to have more pernicious effects on productivity than in advanced economies (Acevedo et al, 2018).…”

“…The damage from adverse events comes through a variety of channels. Natural disasters and wars may damage key infrastructure and disrupt value chains (Acevedo et al, 2018;Cerra and Saxena, 2008). Financial crises increase uncertainty, damage confidence, impede access to finance, and lower corporate earnings-all developments that are likely to reduce investment.…”

Untitled

“…First, weather conditions have a significant impact on the level of labor productivity, which in turn is reflected in changes in real GDP. 1 Second, weather factors (including air temperature, precipitation, and solar radiation) have a direct impact on the volume of agricultural production, especially crop farming (Acevedo et al, 2018).…”