Macroeconomic impact of extreme weather events

Key takeaways

• Different types of extreme weather event have different transmission channels to economic activity and inflation.
• An analysis of eight major economies in the Americas shows that droughts reduce economic output over the two years after they occur due to lasting effects on agriculture, forestry and electricity production.
• It also shows that, while droughts and wildfires temporarily increase food prices and droughts and storms raise energy prices over the following three months, in general there is no persistent impact on inflation.
• Considering the trade-off between growth and inflation, monetary policy may have to react differently in different circumstances: by tightening if price impacts are large and threaten to become persistent, and by loosening if events destroy physical capital and have lasting effects on economic output.