The Effects of Temperature Shocks on Energy Prices and Inflation in the Euro Area

26 Pages Posted: 18 May 2022 Last revised: 13 Apr 2023

See all articles by Francesco Simone Lucidi

Francesco Simone Lucidi

Sapienza University of Rome

Marta Maria Pisa

Sapienza University of Rome

Massimiliano Tancioni

Sapienza University of Rome - Department of Economics and Law

Date Written: May 13, 2022

Abstract

Over the last twenty years, temperature variability has been increasing across Europe, affecting the economy through the demand for energy for heating and cooling needs. This paper provides empirical evidence about the transmission channel of temperature shocks to inflation by estimating a Structural Vector Autoregressive model (SVAR) for six Euro-Area countries. We study hot and cold shocks by starting from monthly regional temperature anomalies and proposing a novel sign-restriction identification scheme. Hot shocks are more relevant than cold ones because they persistently lower energy prices. The negative impact on energy demand due to heatwaves suggests that a turn-off-heating effect outweighs the turn-on-cooling in Europe. That effect prevails in Northern countries, where energy inflation without heatwaves would be higher than the actual one. At the Euro Area level, the overall effect is sizable although limited: the historical contribution of the highest heatwaves accounted for missing annual headline and energy inflation.

Keywords: Climate change, Macroeconomics, Time series, Energy market, Euro Area

JEL Classification: E3, E31, C3, Q4, Q43, Q54

Suggested Citation

Lucidi, Francesco Simone and Pisa, Marta Maria and Tancioni, Massimiliano, The Effects of Temperature Shocks on Energy Prices and Inflation in the Euro Area (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=4109417 or http://dx.doi.org/10.2139/ssrn.4109417

Francesco Simone Lucidi

Sapienza University of Rome ( email )

Piazzale Aldo Moro, 5
Rome, 00185
Italy

Marta Maria Pisa (Contact Author)

Sapienza University of Rome ( email )

Italy

Massimiliano Tancioni

Sapienza University of Rome - Department of Economics and Law ( email )

Via del Castro Laurenziano 9
Rome, Rome 00161
Italy

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