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Weather Shocks, Climate Change and Business Cycles

Ewen Gallic () and Gauthier Vermandel ()

MPRA Paper from University Library of Munich, Germany

Abstract: How much do weather shocks matter? This paper analyzes the role of weather shocks in the generation and propagation of business cycles. We develop and estimate an original DSGE model with a weather-dependent agricultural sector. The model is estimated using Bayesian methods and quarterly data for New Zealand over the sample period 1994:Q2 to 2016:Q4. Our model suggests that weather shocks play an important role in explaining macroeconomic fluctuations over the sample period. A weather shock -- as measured by a drought index -- acts as a negative supply shock characterized by declining output and rising relative prices in the agricultural sector. Increasing the variance of weather shocks in accordance with forthcoming climate change leads to a sizable increase in the volatility of key macroeconomic variables and causes significant welfare costs up to 0.58% of permanent consumption.

Keywords: Business Cycles; Climate Change; Weather Shocks; DSGE (search for similar items in EconPapers)
JEL-codes: C11 C13 E32 E37 Q54 (search for similar items in EconPapers)
Date: 2017-08-26
New Economics Papers: this item is included in nep-agr, nep-dge, nep-env and nep-mac
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