Computing Macro-Effects and Welfare Costs of Temperature Volatility: A Structural Approach

Michael Donadelli, Marcus Jüppner (), Antonio Paradiso () and Christian Schlag ()
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Antonio Paradiso: Ca’ Foscari University of Venice
Christian Schlag: Goethe University Frankfurt - Research Center SAFE

Computational Economics, 2021, vol. 58, issue 2, No 7, 347-394

Abstract: Abstract We produce novel empirical evidence on the relevance of temperature volatility shocks for the dynamics of productivity, macroeconomic aggregates and asset prices. Using two centuries of UK temperature data, we document that the relationship between temperature volatility and the macroeconomy varies over time. First, the sign of the causality from temperature volatility to TFP growth is negative in the post-war period (i.e., 1950–2015) and positive before (i.e., 1800–1950). Second, over the pre-1950 (post-1950) period temperature volatility shocks positively (negatively) affect TFP growth. In the post-1950 period, temperature volatility shocks are also found to undermine equity valuations and other main macroeconomic aggregates. More importantly, temperature volatility shocks are priced in the cross section of returns and command a positive premium. We rationalize these findings within a production economy featuring long-run productivity and temperature volatility risk. In the model temperature volatility shocks generate non-negligible welfare costs. Such costs decrease (increase) when coupled with immediate technology adaptation (capital depreciation).

Keywords: Temperature volatility; Productivity; Asset prices; Welfare costs (search for similar items in EconPapers)
JEL-codes: E30 G12 Q0 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (20)

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DOI: 10.1007/s10614-020-10031-3

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