The macroeconomic effects of temperature shocks in Europe

Excessive heat and cold weather waves may affect economic activity through energy markets. Yet, if a clear distinction of those events from other sources of variation in the economy would help central banks in stabilizing inflation is a research question that lacks theoretical and empirical support. This paper provides evidence on the impact of temperature anomalies on energy and industrial productions, energy and consumer prices, and energy futures prices. We estimate a Bayesian Structural VectorAutoregressive model for six Euro-Area countries and explore the effects of hot and cold structural shocks that we identify by employing a sign-restrictions identification scheme. We find that hot shocks are more harmful than cold ones for price stabilization; in particular, they change inflation sensibly by affecting both production and price expectations of energy. However, we also find that the financial markets, the geography, and the relative energy market position of the countries play a pivotal role in the transmission mechanism of these shocks