Brown Bag Seminar: Fiscal Impacts of Climate Anomalies

The negative effects of climate change on output and productivity are well documented, but its fiscal impacts are still little explored. This paper analyses how climate anomalies affect fiscal variables over a business cycle horizon. We construct temperature and precipitation shocks for a panel of 15 developed countries. Impulse response functions from a Bayesian Panel VAR show that adverse climate shocks are contractionary and significantly increases deficit and public debt. Temperature shocks have more severe effects in warmer, vulnerable, and highly indebted countries. Digging deeper, lower tax revenues and higher public subsidies are key channels of the detected fiscal impacts.