The effects of climate risks on economic activity in a panel of US states: The role of uncertainty

Sheng, Xin, Gupta, Rangan and Çepni, Oğuzhan (2022) The effects of climate risks on economic activity in a panel of US states: The role of uncertainty. Economics Letters, 213. p. 110374. ISSN 0165-1765

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We analyse the impact of climate risks (temperature growth and its volatility) on the coincident indicator of the 50 US states in a panel data set-up, over the monthly period of March, 1984 to December, 2019. Using impulse response functions (IRFs) from a linear local projections (LPs) model, we show that climate risks negatively impact economic activity to a similar degree, irrespective of whether such risks are due to changes in temperature growth or its volatility. More importantly, using a nonlinear LPs model, the IRFs reveal that the adverse effect of climate risks is contingent on the regimes of economic and policy-related uncertainty of the states, with the impact being significantly much stronger under relatively higher values of uncertainty, rather than lower values of the same. In addition to this, temperature growth volatility is found to contract economic activity nearly five times more compared to when temperature growth increases by a similar magnitude in the higher uncertainty-based regime of the nonlinear model. Understandably, our results have important policy implications.

Item Type: Journal Article
Keywords: Climate risks, Uncertainty, Economic activity, US states, Linear and nonlinear local projections, Impulse response functions
Faculty: Faculty of Business & Law
SWORD Depositor: Symplectic User
Depositing User: Symplectic User
Date Deposited: 10 Mar 2022 10:01
Last Modified: 11 May 2022 11:30

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