The Macroeconomic Effects of Temperature Surprise Shocks

Abstract

The question of how climate change and weather fluctuations affect the economy is high on the economic research agenda, but the quantification of the effects of temperatures at infra-annual frequencies still remains an open issue. Using daily county-level data since 1970, I construct quarterly temperature shocks for the United States that capture the average surprise effect of very high and low temperatures in each county and quarter, isolating their unanticipated component. Unfavorable temperature shocks are found to reduce GDP, consumer prices and interest rates, pointing to a slowdown in aggregate demand.

Keywords: temperature shocks, business cycle, climate change, monetary policy

JEL Classification: C32, E32, E52, Q54