Fresh evidence from temperature effects on growth and economic policy uncertainty: A panel quantile approach

Abstract

This paper provides fresh evidence of temperature effects on GDP per capita growth and economic policy uncertainty $\left(epu\right)$. We apply the quantile via moments methodology (Machado and Santos Silva, 2019) in a sample of 31 countries for the period 1980–2021, the most current time frame of the work we reviewed. To the best of our knowledge, temperature effects on $epu$, in a panel quantile setting, have not been examined before. Our empirical results provide evidence in favor of asymmetric temperature impacts on both growth rates and $epu$. Specifically, according to our main findings: First, the impact of temperature on the growth rate of GDP per capita is quadratic, negative and increases, in absolute terms, as we move from the upper (flourishing economy) to the lower (bearish economy) quantiles. Second, hotter countries are more vulnerable to economic policy uncertainty, with the effect being more pronounced as uncertainty increases. Third, the temperature effect on GDP is higher than the political effect in weaker economies, while the political effect becomes of greater magnitude in stronger economies. Overall, our results indicate that an increase in temperature due to climate change poses important threats for the development prospects especially, but not exclusively, of the poorer countries that usually have both higher temperatures and face severe issues of economic policy uncertainty due to political instability and lack of basic economic infrastructure.