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Weather Shocks

Abstract : How much do weather shocks matter? The literature addresses this question in two isolated ways: either by looking at long-term effects through the prism of calibrated theoretical models, or by focusing on both short and long terms through the lens of empirical models. We propose a framework that reconciles these two approaches by taking the theory to the data in two complementary ways. We first document the propagation mechanism of a weather shock using a Vector Auto-Regressive model on New Zealand Data. To explain the mechanism, we build and estimate a general equilibrium model with a weather-dependent agricultural sector to investigate the weather’s business cycle implications. We find that weather shocks: (i) explain about 35% of GDP and agricultural output fluctuations in New Zealand; (ii) entail a welfare cost of 0.30% of permanent consumption; (iii) critically increases the macroeconomic volatility under climate change, resulting in a higher welfare cost peaking to 0.46% in the worst case scenario of climate change.
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Ewen Gallic, Gauthier Vermandel. Weather Shocks. European Economic Review, Elsevier, 2020, 124, pp.103409. ⟨10.1016/j.euroecorev.2020.103409⟩. ⟨hal-02498669⟩



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