Persistence of State-level Uncertainty of the United States: The Role of Climate Risks

Xin Sheng, Rangan Gupta, Oguzhan Cepni*

*Corresponding author for this work

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Abstract

Recent theoretical developments tend to suggest that rare disaster risks enhance the persistence of uncertainty. Given this, we analyse the impact of climate risks (temperature growth or its volatility), as proxies for such unusual events, on the persistence of economic and policy-related uncertainty of the 50 US states in a panel data set-up, over the monthly period of 1984:03 to 2019:12. Using impulse response functions (IRFs) from a regime-based local projections (LPs) model, we show that the impact of an uncertainty shock on uncertainty itself is not only bigger in magnitude when the economy is in the upper-regime of temperature growth or its volatility, but is also, in line with theory, is more persistent. Our results have important policy implications.
Original languageEnglish
Article number110500
JournalEconomics Letters
Volume215
Number of pages5
ISSN0165-1765
DOIs
Publication statusPublished - Jun 2022

Keywords

  • Uncertainty
  • Climate risks
  • US states
  • Nonlinear local projections
  • Impulse response functions

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