Extreme Weather Shocks and State-Level Inflation of the United States

Wenting Liao (), Xin Sheng (), Rangan Gupta and Sayar Karmakar ()
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Wenting Liao: School of Finance, Renmin University of China, Beijing, People's Republic of China
Xin Sheng: Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, UK
Sayar Karmakar: Department of Statistics, University of Florida, 230 Newell Drive, Gainesville, FL, 32601, USA

No 202402, Working Papers from University of Pretoria, Department of Economics

Abstract: This study investigates the impact of a metric of extreme weather shocks on 32 state-level inflation rates of the United States (US) over the quarterly period of 1989:01 to 2017:04. In this regard, we first utilize a dynamic factor model with stochastic volatility (DFM-SV) to filter out the national factor from the local components of overall, non-tradable and tradable inflation rates, to ensure that the effect of regional climate risks is not underestimated, given the derived sizeable common component. Second, using impulse responses derived from linear and nonlinear local projections models, we find statistically significant increases in the state (and national) factor of overall inflation rates, with the aggregate effect being driven by the tradable sector relative to the non-tradable one, particularly across the agricultural states in comparison to the non (less)-agricultural ones. Our findings have important policy implications.

Keywords: Extreme weather shocks; Inflation; US states; Dynamic factor model with stochastic volatility; Linear and nonlinear local projections; Impulse response functions (search for similar items in EconPapers)
JEL-codes: C22 C23 C32 E31 Q54 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2024-01
New Economics Papers: this item is included in nep-env and nep-mon
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Citations: View citations in EconPapers (1)

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