Extreme Weather and the Macroeconomy

Abstract

We investigate the macroeconomic effects of changes in extreme weather in the United States over the past sixty years by incorporating the Actuaries Climate Index (ACI) into a smooth transition vector autoregressive analysis of the United States economy. The ACI tracks changes in the distribution of extreme temperatures, heavy rainfall, drought, high wind, and sea level. While the effects of extreme weather events are negligible at the beginning of the sample, they become more significant later: An increase in the index now persistently reduces the growth rate of industrial production while raising the unemployment rate and inflation.