Does Temperature affect Income?

Dennis Wesselbaum

Economics Bulletin, 2021, vol. 41, issue 1, 18-27

Abstract: In this paper, I contribute to the literature on the relationship between temperature and the level of income. I build a panel data set with 198 countries over 36 years. In contrast to the existing literature, I use a Panel Vector autoregression model and identify temperature shocks with volcanic activity. I find that, in line with theory, volcanic activity creates a significant cooling effect. Then, I present estimated impulse response functions and find that the level of log GDP per capita is reduced by about three percent for more than ten years in response to a 1C increase in temperatures. My results support the existence of a direct effect of temperature on income.

Keywords: Climate Change; GDP; Panel VAR; Temperature (search for similar items in EconPapers)
JEL-codes: E2 Q5 (search for similar items in EconPapers)
Date: 2021-03-10
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