How do Macroeconomic Expectations React to Extreme Weather Shocks?

Abstract:

I study how extreme weather events affect macroeconomic expectations to better understand the propagation of climate shocks. I identify the immediate and dynamic effects of a Hurricane Katrina-sized shock on business economists’ expectations of GDP growth, inflation, and interest rates over the past two decades. My results highlight the importance of forecast revision dynamics. A shock reduces expected growth, but the total dynamic effect is more than double the immediate effect. It is also perceived as a negative supply shock as inflation expectations rise and interest rate expectations fall. The persistence of the response supports models of delayed overshooting.