Weather Shocks, Climate Change and Business Cycles

Gallic, Ewen and Vermandel, Gauthier (2017): Weather Shocks, Climate Change and Business Cycles.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Business Cycles; Climate Change; Weather Shocks; DSGE
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

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