Abstract:
A damage function measures quantitatively how aggregated economies respond to climate change and it have been used as a powerful tool to provide trajectories of future economic development. However, the specification of the damage function remains highly contentious. In this paper we extend the conventional damage function by introducing interactive terms between temperature and precipitation. Our new specification allows for heterogeneous responses to climate change in different climate conditions, making possible the response to temperature change dependent on precipitation levels, and vice versa. The results show that all temperature, precipitation, as well as their interaction are statistically significant factors affecting economic growth. The most sensitive economy to climate change is the combination of cold temperature with excessive precipitation, in which case, either reduced rainfall or a warming trend could benefit economic growth considerably such as in Canada and Northern Europe countries. Compared to cold climate economies, economies with moderate to warm climates are more resilient to precipitation change, which could possibly be attributed to their adaptation to climates characterizing high variability in precipitation. By estimating historical impacts of temperature changes, we find that except for countries in high latitudes in the Northern Hemisphere that benefit from the warming, massive negative impacts are found in most countries in the world, with the Northern Africa and Southeast Asia being affected the most. We also find that only 17 countries report significant precipitation trends—13 of them experience more precipitation and the remaining 4 report drying trends. The wetting trends are found beneficial to dry regions, such as Russia, and harmful to wet regions, such as Canada and the US. On the other hand, the drying trends are found ubiquitously damaging to local economies which tend to have modest precipitation in the first place.
Citation:
Yuan, M., Leirvik, T., & Karabiyik, H. (2023), 'Interactive Effects of Temperature and Precipitation on Global Economic Growth', Working Paper, https://my1396.github.io/images/GDP_letter_like_2023-02-01.pdf