The stochastic impact of extreme weather events | National Institute of Economic and Social Research
Global warming is likely to increase the frequency and intensity of extreme or abnormal weather events (Herring et al, 2018, NASEM, 2016). In this note, we quantify the uncertainty of GDP outcomes resulting from abnormal weather events, considering both the initial destruction that is caused by the event as well as the boost to activity from the subsequent rebuild. We deploy our global macroeconometric model, NiGEM, which specifically allows for spillover effects from one economy to another. Our analysis shows that extreme weather events cause economic volatility and that spillovers magnify the effects of these events. We show that these spillovers are particularly important for small open economies that are densely populated.