Temperature and Growth: Seasonal and Non-Linear Effects Using EU Subnational Data

Abstract

We study the impact of temperature on aggregate and sector-specific growth in gross value added using regional EU data observed over 1980-2019 using a mixed frequency dataset. The regional data on economic growth are annual and, since there is wide consensus on projections of a temperature rise more concentrated during fall-winter than spring-summer, we focus on seasonal region-specific temperature shocks and on their interaction also with global seasonal temperature of a given year. The empirical analysis, based on panel local projections, suggests no evidence of adaptation and projections of large losses during hot seasons under a scenario of no implementation of climate change mitigation policies. Investments are important transmission channels driving a negative effect on growth due to a one-degree Celsius increase in the level of seasonal temperature. Moreover, construction is the most vulnerable sector, and the regions with a higher income per capita or competitiveness are the most resilient to temperature shocks.