The Effects of Uncertainty on Economic Conditions Across <scp>US</scp> States: The Role of Climate Risks

ABSTRACT We analyze the impact of uncertainty on the Economic Conditions Index (ECI) of the 50 US states in a panel data set‐up, over the weekly period of the 3rd week of April 1987 to the 4th week of March 2023. Using impulse response functions (IRFs) from a linear local projections (LP) model, we show that uncertainty, as captured by the stochastic volatility (SV) of the ECIs, negatively impacts ECI in a statistically significant manner. More importantly, using a nonlinear LP model, the IRFs reveal that the adverse effect of uncertainty is significantly stronger under the high‐regime of climate risks when compared to the low‐regime of the same. Understandably, our results have important policy implications. JEL Classification: C23, D80, E32, Q54