Welfare Costs of Long-Run Temperature Shifts / Ravi Bansal, Marcelo Ochoa.

Format:

Book

Author/Creator:

Bansal, Ravi.

Contributor:

National Bureau of Economic Research.

Ochoa, Marcelo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17574.

NBER working paper series no. w17574

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

This article makes a contribution towards understanding the impact of temperature fluctuations on the economy and financial markets. We present a long-run risks model with temperature related natural disasters. The model simultaneously matches observed temperature and consumption growth dynamics, and key features of financial markets data. We use this model to evaluate the role of temperature in determining asset prices, and to compute utility-based welfare costs as well as dollar costs of insuring against temperature fluctuations. We find that the temperature related utility-costs are about 0.78% of consumption, and the total dollar costs of completely insuring against temperature variation are 2.46% of world GDP. If we allow for temperature-triggered natural disasters to impact growth, insuring against temperature variation raise to 5.47% of world GDP. We show that the same features, long-run risks and recursive-preferences, that account for the risk-free rate and the equity premium puzzles also imply that temperature-related economic costs are important. Our model implies that

a rise in global temperature lowers equity valuations and raises risk premiums.

Notes:

Print version record

November 2011.