Temperature shocks and monetary policy in the United States

How temperature dynamics affect the economy is key to understanding the impact of climate change on fiscal policy. This column presents new evidence that local temperature fluctuations had an overall effect on the United States over the past 50 years. The results show that US-wide temperature shocks, weighted by unexpected county-level temperature variations, reduced both GDP and consumer prices, prompting an expansionary monetary policy response and a revision of the Federal Reserve’s economic forecast.

Climatologists and economists all agree – climate change is a threat to future economic performance and one of the major structural problems of the global economy (Blanchard and Tirol 2022). The literature has indeed shown that, in recent decades, rising and unstable temperatures have significantly reduced GDP, with developed countries such as the United States no exception. This creates challenges for governments to develop appropriate policies in response to uncertain climate outcomes and to coordinate their efforts across countries.

The urge to curb climate change has also fueled debate among central bankers about what they can do to support the fight (e.g. Boneva et al. 2022, Hartmann et al. 2022, Masciandaro and Russo 2022). However, although the discussion relies on the potential impact of climate-related events on central bank activity and, in particular, on the conduct of monetary policy, it generally lacks solid empirical grounding. This depends on whether the joint effects of climate on economic output and consumer prices, as well as the appropriate monetary policy response, are open issues. Because adverse temperatures can have both supply-side effects (for example, reducing labor productivity) and demand-side (for example, changing consumption patterns or diverting capital to increase climate resilience). Therefore, it is not clear, a priori, what the overall price response to temperature variations might be and, consequently, whether and how monetary policy will respond to them.

My recent paper (Natoli 2022) addresses this issue by quantifying the impact of temperature fluctuations on the US economy. I study how GDP, private consumption, and investment are affected, how the CPI index responds, and, in turn, how these effects propagate to short- and long-term interest rates on government bonds. To this end, I propose a new way of detecting unexpected changes in temperature that fits the concept of a shock to the macroeconomics.

Construction of temperature shock

Temperature shocks are generated using daily average temperature data for each US county since the 1970s. Quarterly county-level temperature ‘surprises’ are calculated as the difference between the number of days with the highest and lowest temperature in the quarter and the number of days observed in the same county during the same quarter over the past five years. The logic is that, based on their recent experience, agents learn over time about the set of prevailing temperatures in each season, updating their beliefs each year. If the number of seasonal highs and lows in a quarter exceeds expectations, it represents a positive – economically damaging – surprise. By focusing on the size and stability of temperature variations and detecting outliers relative to recent temperature levels, this approach emphasizes the idea that unexpected exceptionally hot and cold weather is important for short periods. It therefore overcomes some of the shortcomings of the standard approach used in the literature based on positive versus negative temperature variations – which can potentially mix good and bad economic shocks – and detection based on actual changes relative to historical temperature averages – which miss continuous adaptation. Agents of increasingly frequent temperature extremes.

The county-level surprises are then combined to obtain the US-wide temperature shock. Figure 1 shows the evolution over time of the occurrence of shocks by county (Panel A) and US-wide temperature shocks (Panel B). The first figure reveals that, between 1975 and 2019, surprises were highest in southern and western counties; The second figure shows that, at the national level, the adjustments in the shape of the temperature distribution were largest in the early part of the sample compared to recent periods – giving a big shock. This does not mean that temperature fluctuations have decreased in size, but simply that temperature extremes have become more normal in recent times, less surprising than in the past.

Figure 1 County-level temperature surprises and US-wide temperature shocks

(a) Average size of county-level surprises

(b) US-wide temperature shock

The impact of temperature on the US economy and monetary policy

The constructed US-wide shock is used to study the average response of key economic variables to temperature variation between 1975q1 and 2019q4 using local estimates (Jordà 2005). Figure 2 shows the impact on the US economy up to 16 quarters after the shock: exceptional temperatures have a negative impact on GDP, which increases over time reaching a trough after 2 years, with a strong impact coming from private investment, in line with Lemoine (2021). Furthermore, shocks reduce the consumer price index (albeit by a margin), suggesting that demand-side effects are predominant. Temperature also prompts a significant response by the Federal Reserve, shown in Figure 3: In line with the response to GDP, the Fed’s economic nowcast (produced within the set of Greenbook forecasts) has also been revised, tracking recessions over time (first image). This prompts an expansionary monetary policy response as short rates also fall, with the effect spreading to the long end of the yield curve (second and third figures). While the behavior of interest rates by itself is not a guarantee that the Federal Reserve has correctly identified the source of the recession, some evidence points to increased Fed attention to temperature fluctuations. Indeed, the occurrence of temperature-related noise in transcripts of individual FOMC meetings increases slightly after adverse temperature shocks (Figure 4).

Figure 2 The impact of temperature on the US economy, up to 16 quarters after the shock

Figure 3 The Federal Reserve responded, up to 16 quarters after the shock

Overall, these results suggest that climate-related shocks have concurred in influencing the behavior of US monetary policy over the past 50 years, adding evidence to the debate about the role central banks can play in addressing the economic impacts of climate. Change. The technique used to construct the US temperature shock can be applied to other economies and serve as a reference for deriving other weather-related shocks under the same logic.


Blanchard O, J Tirole (2022), “Major future economic challenges”, VoxEU.org, 21 March.

Boneva, L, G Ferrucci and FP Mongelli (2022), “To be green or not to be green, part 1: Why climate change is relevant for fiscal policy”, VoxEU.org, 17 June.

Hartmann, P, A Leonello, S Manganelli, M Papoutsi, I Schnabel and JD Sigaux (2022), “Central banks, climate change, and economic efficiency”, VoxEU.org, 10 June.

Lemoine, D (2021), “Estimating the economic impact of climate change from climate change”, VoxEU.org, 9 July.

Masciandaro, D and R Russo (2022), “Central banks and climate policy: unpleasant trade-offs likely”, VoxEU.org, 18 July.

Natoli, F (2022), “Macroeconomic Implications of Temperature Shocks”, Available at SSRN

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