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Mr. Sebastian Acevedo Mejia, Mr. Mico Mrkaic, Natalija Novta, Evgenia Pugacheva, and Petia Topalova
Global temperatures have increased at an unprecedented pace in the past 40 years. This paper finds that increases in temperature have uneven macroeconomic effects, with adverse consequences concentrated in countries with hot climates, such as most low-income countries. In these countries, a rise in temperature lowers per capita output, in both the short and medium term, through a wide array of channels: reduced agricultural output, suppressed productivity of workers exposed to heat, slower investment, and poorer health. In an unmitigated climate change scenario, and under very conservative assumptions, model simulations suggest the projected rise in temperature would imply a loss of around 9 percent of output for a representative low-income country by 2100.
Mr. Selim A Elekdag and Maxwell Tuuli
This paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Does greater exchange rate flexibility help an economy’s adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium-term adverse growth impact of a 1 degree Celsius increase in temperature under a pegged regime is about –1.4 percentage points on average, while under a flexible regime, the impact is less than one half that amount (–0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers.
Mr. Sebastian Acevedo Mejia, Claudio Baccianti, Mr. Mico Mrkaic, Natalija Novta, Evgenia Pugacheva, and Petia Topalova
We explore the extent to which macroeconomic policies, structural policies, and institutions can mitigate the negative relationship between temperature shocks and output in countries with warm climates. Empirical evidence and simulations of a dynamic general equilibrium model reveal that good policies can help countries cope with negative weather shocks to some extent. However, none of the adaptive policies we consider can fully eliminate the large aggregate output losses that countries with hot climates experience due to rising temperatures. Only curbing greenhouse gas emissions—which would mitigate further global warming—could limit the adverse macroeconomic consequences of weather shocks in a long-lasting way.
Mr. Sebastian Acevedo Mejia, Claudio Baccianti, Mr. Mico Mrkaic, Natalija Novta, Evgenia Pugacheva, and Petia Topalova

the Debt, Investment and Growth (DIG) model of Buffie et al. (2012) . The model is used to simulate how specific macroeconomic policies and structural transformation help reduce the negative effect of temperature shocks. 4 The model addresses a potential endogeneity concern that only countries with the most severe climate shocks introduce climate adaptation policies, which then may erroneously appear to be relatively ineffective. Model simulations are consistent with our empirical findings about which specific policies might help and confirm that none can fully