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Weather Shocks

Ewen Gallic and Gauthier Vermandel ()
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Ewen Gallic: Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE, https://www.amse-aixmarseille.fr/fr/membres/gallic

No 1915, AMSE Working Papers from Aix-Marseille School of Economics, France

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 theoretical models, or by focusing on short-term effects using empirical analysis. We propose a framework to bring together both the short and long-term effects through the lens of an estimated DSGE model with a weather-dependent agricultural sector. The model is estimated using Bayesian methods and quarterly data for New Zealand using the weather as an observable variable. In the short-run, our analysis underlines the key role of weather as a driver of business cycles over the sample period. An adverse weather shock generates a recession, boosts the non-agricultural sector and entails a domestic currency depreciation. Taking a long-term perspective, a welfare analysis reveals that weather shocks are not a free lunch: the welfare cost of weather is currently estimated at 0.19% of permanent consumption. Climate change critically increases the variability of key macroeconomic variables (such as GDP, agricultural output or the real exchange rate) resulting in a higher welfare cost peaking to 0.29% in the worst case scenario.

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)
New Economics Papers: this item is included in nep-agr, nep-bec, nep-dge, nep-env and nep-mac
Date: 2019-05
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