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Weather shocks

Ewen Gallic () and Gauthier Vermandel ()

European Economic Review, 2020, vol. 124, issue C

Abstract: How much do weather shocks matter? The literature addresses this question in two isolated ways: either by looking at long-term effects through the prism of calibrated theoretical models, or by focusing on both short and long terms through the lens of empirical models. We propose a framework that reconciles these two approaches by taking the theory to the data in two complementary ways. We first document the propagation mechanism of a weather shock using a Vector Auto-Regressive model on New Zealand Data. To explain the mechanism, we build and estimate a general equilibrium model with a weather-dependent agricultural sector to investigate the weather’s business cycle implications. We find that weather shocks: (i) explain about 35% of GDP and agricultural output fluctuations in New Zealand; (ii) entail a welfare cost of 0.30% of permanent consumption; (iii) critically increases the macroeconomic volatility under climate change, resulting in a higher welfare cost peaking to 0.46% in the worst case scenario of climate change.

Keywords: Agriculture; Business cycles; Climate change; Weather shocks (search for similar items in EconPapers)
JEL-codes: C13 E32 Q54 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Weather Shocks (2020) Downloads
Working Paper: Weather Shocks (2019) Downloads
Working Paper: Weather Shocks (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:124:y:2020:i:c:s0014292120300416

DOI: 10.1016/j.euroecorev.2020.103409

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