Severe Weather and Financial (In)stability*

Claudia Foroni Paolo Gelain Marco Lorusso Massimiliano Marcellino

No 26266, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We quantify the effect of severe weather shocks on the US economy in an environment in which the economy can switch between periods of financial stability and financial instability, like the Great Recession. We estimate a New Keynesian dynamic stochastic general equilibrium model with banks and severe weather events. We show that severe weather shocks: 1) have a negative impact on real and financial US variables, sizable only in periods of financial instability, but muted effects on nominal variables; 2) are never a relevant source of business cycles fluctuations; 3) transmit mainly via a deterioration in the quality of capital.

Keywords: Severe weather shocks; Actuaries Climate Index; NK DSGE models; Financial frictions; Markov Switching (search for similar items in EconPapers)
JEL-codes: E32 E44 Q54 (search for similar items in EconPapers)
Pages: 51
Date: 2026
New Economics Papers: this item is included in nep-dge and nep-fdg
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