Extreme Weather and the Macroeconomy

Abstract

We investigate the impacts of severe weather shocks on the U.S. macroeconomy over the past sixty years. Using a smooth transition vector autoregressive model, we find robust evidence of time-varying effects. While negligible at the beginning of the sample, the impacts become significant at the end, where an increase in the severe weather index reduces aggregate industrial production and consumption growth rates, and raises aggregate unemployment and inflation rates. The effects are persistent up to 20 months. Our findings suggest limited adaptation to increased severe weather in the U.S., at least at the macroeconomic level.

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