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The asymmetric effects of temperature shocks on inflation in the largest euro area countries

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  • Ciccarelli, Matteo
  • Kuik, Friderike
  • Martínez Hernández, Catalina

Abstract

This paper assesses the impact of temperature shocks on sectoral inflation in the four largest euro area economies. We combine high-frequency weather data with monthly data on consumer prices, industrial production, producer prices and farm gate prices within a set of Bayesian Vector Autoregressions which explicitly considers the seasonal dependence of the shock. Results suggest the presence of significant country asymmetries and seasonal responses of inflation to temperature shocks, mainly via food, energy and service prices. An increase in monthly mean temperatures has inflationary effects in summer – with a stronger response in warmer euro area countries – and reduces inflation on average in the other seasons.

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  • Ciccarelli, Matteo & Kuik, Friderike & Martínez Hernández, Catalina, 2024. "The asymmetric effects of temperature shocks on inflation in the largest euro area countries," European Economic Review, Elsevier, vol. 168(C).
    • Handle: RePEc:eee:eecrev:v:168:y:2024:i:c:s001429212400134x
    DOI: 10.1016/j.euroecorev.2024.104805
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    More about this item

    Keywords

    Weather shocks; Climate change; Inflation; Vector autoregression;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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