Climate shocks, economic activity and cross-country spillovers: Evidence from a new global model

This study investigates the impact of climate shocks on economic activity, addressing the gap in the literature of climate change economics. Using data covering a time span of 59 years, from 1960 to 2019, we employ a new global model to examine the effects of temperature and precipitation shocks on real output across 33 countries, accounting for more than 90% of the world’s gross domestic product. Our analysis reveals that hotter and less-developed countries are more exposed to temperature shocks. Moreover, only some colder and more developed countries show a contraction of output in the medium-long run. Our results highlight trade interconnections as the main channel of propagation of climate shocks into the economic system. This study offers new insights into the transmission mechanism of climate shocks and suggests the adoption of climate policies at both global and local levels. • We study the effect of climate shocks on economic activity via a new global model. • The link between temperature/precipitation shocks and output is significant. • Temperature shocks are more significant for hotter/less-developed countries. • Trade interconnections are shown to be the main driver of the results. • There is need of policies to manage the economic effects of climate shocks.