Temperature and Real Exchange Rates

Yue Gu, Jing Zhang and Xiaohui Liu

China & World Economy, 2025, vol. 33, issue 4, 58-90

Abstract: This study incorporates average temperature into the Balassa–Samuelson model to examine the impact of temperature differences on real exchange rates (RERs). It demonstrates that the classic Balassa–Samuelson model is a special case of a more generalized model. When average temperature differences reduce relative productivity with temperature effects, RERs tend to depreciate; otherwise, they appreciate. A cross‐sectional analysis of 163 economies from 1980 to 2019 indicates a significant negative relationship between average temperature and the RER. If the average temperature in one economy is 0.19°C higher than that in another, its RER tends to depreciate by 5.75 percent to 6.01 percent. This effect is observable only when the average temperature exceeds 14°C or 15°C. The depreciation is more pronounced in wealthier or less agriculture‐dependent economies.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bla:chinae:v:33:y:2025:i:4:p:58-90

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