“It’s not the heat, it’s the humidity!” New Climate Indices for Europe with a Multilevel Factor Model

Chiara Casoli, Matteo Manera, Luca Pedini and Daniele Valenti
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Chiara Casoli: InsIDE Lab, Department of Economics-DiECO, University of Insubria and Fondazione Eni Enrico Mattei
Matteo Manera: Department of Economics, Management and Statistics-DEMS, University of Milano-Bicocca and Fondazione Eni Enrico Mattei
Luca Pedini: Fondazione Eni Enrico Mattei
Daniele Valenti: Department of Management, Economics and Industrial Engineering, Polytechnic of Milano and Fondazione Eni Enrico Mattei

No 2025.23, Working Papers from Fondazione Eni Enrico Mattei

Abstract: We construct a comprehensive set of climate indices for European countries that account for several variables related to weather, atmospheric conditions, and water availability. Our dataset includes monthly gridded climate observations from ERA5-Land, aggregated at the country level. Employing a Multilevel Dynamic Factor Model, we disentangle a global indicator, capturing overall climate dynamics across Europe, from country-specific local indices. While most empirical studies proxy climate through temperature or precipitation, our approach acknowledges that other atmospheric dimensions, such as humidity, radiation, and evaporation, jointly shape climatic variability and its economic effects. The global index primarily reflects temperature patterns common to most European countries, whereas the local indicators capture other meteorological phenomena and variations in water reserves. Finally, we show, via panel local projections, that different filtering and detrending procedures used to construct climate anomalies influence the estimated effects of climate shocks on economic activity.

Keywords: Climate measures; climate impacts; Multilevel Factor Models; panel local projections (search for similar items in EconPapers)
JEL-codes: C38 C55 O44 Q54 Q56 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-env, nep-eur, nep-mac and nep-res
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