The Regional Economic Impact of Weather Shocks

This study examines the short-term economic impacts of weather shocks on inflation, unemployment, disposable income, and housing prices using a panel of Portuguese municipalities from 2007 to 2021. Employing a panel vector autoregressive model with exogenous variables and local projections, we analyze deviations from historical averages and variability in temperature and precipitation. Our findings reveal that precipitation variability induces the most pronounced inflationary pressures, surpassing those from temperature variability, with significant nonlinear effects. By incorporating subnational weather data and a novel measure of precipitation variability, this study captures localized and immediate economic disruptions often overlooked in long-term analyses. While inflation responds strongly to weather variability, the effects on other macroeconomic indicators are comparatively muted. Findings highlight the need for adaptive monetary policies that account for transient inflationary shocks, alongside targeted investments in climate-resilient infrastructure to mitigate the risks posed by increasing weather volatility.