A LOCAL PROJECTION APPROACH TO THE IMPACT OF CLIMATE SHOCKS: EVIDENCE FROM A PORTUGUESE PANEL OF MUNICIPALITIES

We investigate the impact of climate shocks on key macroeconomic variables, focusing on a Portuguese panel of municipalities. We combine a local projection approach with big data. Utilizing quarterly data from 2007 to 2021, we analyze how deviations from historical averages, and variability in weather variables - specifically temperature, precipitation, and surface pressure affect inflation, unemployment, disposable income, and housing prices. The results indicate that temperature shocks are associated with transient inflation spikes, whereas precipitation variability leads to more pronounced and immediate economic disruptions. Our findings suggest that localized climate shocks pose substantial challenges to monetary policy, particularly within the constraints of the Eurozone's centralized interest rate policy. The study highlights the necessity for integrating climate-related variables into the ECB's policy framework and adopting regional strategies to mitigate the economic consequences of climate variability. As the first paper of its kind for Southern Europe, this research provides critical insights into the dynamic relationship between climate shocks and economic stability in Portugal, offering a framework for future policy considerations.