Global Temperature, R&D Expenditure, and Growth
41 Pages Posted: 25 Nov 2017
Date Written: November 21, 2017
We shed new light on the macroeconomic effects of rising temperatures. In the data, a shock to global temperature dampens expenditures in research and development (R&D). We rationalize this empirical evidence within a stochastic endogenous growth model, featuring temperature risk and growth sustained through innovations. In line with the novel evidence in the data, temperature shocks undermine economic growth via a drop in R&D. Moreover, in our endogenous growth setting temperature risk generates non-negligible welfare costs (i.e., 11% of lifetime utility). An active government, which is committed to a zero fiscal deficit policy, can offset the welfare costs of global temperature risk by subsidizing the aggregate capital investment with one-fifth of total public spending.
Keywords: Global Temperature, R&D, Welfare Costs
JEL Classification: E30, G12, Q00
Suggested Citation: Suggested Citation