Severe weather and financial (in)stability

Claudia Foroni, Paolo Gelain, Massimiliano Marcellino and Marco Lorusso

No 3211, Working Paper Series from European Central Bank

Abstract: We quantify the effect of severe weather shocks on the US economy in an environment in which the economy can switch between periods of financial stability and financial instability, like the Great Recession. We estimate a New Keynesian dynamic stochastic general equilibrium model with banks and severe weather events. We show that severe weather shocks: 1) have a negative impact on real and financial US variables, sizable only in periods of financial instability, but muted effects on nominal variables; 2) are never a relevant source of business cycles fluctuations; 3) transmit mainly via a deterioration in the quality of capital. JEL Classification: Q54, E32, E44

Keywords: actuaries climate index; financial frictions; Markov switching; NK DSGE models; severe weather shocks (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-dge and nep-env
Note: 3243564
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263211

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