No. 1407 - The macroeconomic effects of temperature surprise shocks

This paper proposes a new indicator to measure the incidence of days with unexpectedly high or low average temperatures at local level on a quarterly basis. The indicator, computed separately for each single county in the United States and then aggregated at national level, is used to estimate the macroeconomic effects of extreme temperatures on GDP, consumer prices and interest rates on government bonds, with a specific focus on the reaction of the Federal Reserve.

An increase in the number of unexpectedly hot or cold days in a given quarter has a negative effect on US GDP, mainly due to a decrease in private investments and in purchases of durable goods. Extreme temperatures are also associated with a reduction in consumer prices, consistent with a decline in aggregate demand. Moreover, the subsequent fall in short- and long-term interest rates suggests an expansionary reaction by the Federal Reserve.

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