Critique of Fed Claim That a Year of Above Average Temps Increases Odds of a Recession

(p. A17) . . . recently I published a critique of a study from the Federal Reserve Board claiming that a year of above-normal temperatures in countries around the world makes economic contraction more likely.

. . .

There are two main reasons why the Fed study appeared at first to show a statistically significant effect of temperatures on economic growth. First, each country in the sample had equal weight in the analysis. China had the same weight as St. Vincent though China’s population is 13,000 times as large. Equal weighting means that some small countries with unusual histories of economic growth greatly influenced the results.

The paper’s results disappeared when countries like Rwanda and Equatorial Guinea—which had economic catastrophes and bonanzas unrelated to climate change—were omitted. Omitting similar countries representing less than 1% of world gross domestic product was enough to eliminate the paper’s result. The complicated statistical techniques used in the Fed study magnified the influence of these unusual countries.

There’s a second reason why the Fed study appears to find that temperature affects growth: Many poor countries have warm climates. A warm climate doesn’t preclude economic growth, as is demonstrated by Florida, Arizona, Taiwan, Singapore and several Persian Gulf states. But the average poor country is warmer than the average rich country. Debate continues as to whether this correlation is random or causal, but the hypothesis of the Fed paper is that year-to-year increases in temperature reduce annual economic growth. The paper claims that its method controls for long-term differences in climate, but using simulated data I found that the Fed paper’s method can be fooled into finding an effect that doesn’t exist.

For the full commentary, see:

David Barker. “The Fed’s Climate Studies Are Full of Hot Air.” The Wall Street Journal (Monday, April 10, 2023): A17.

(Note: ellipses added.)

(Note: the online version of the commentary has the date April 9, 2023, and has the same title as the print version.)

Barker’s critique mentioned above is:

Barker, David. “Temperature and Economic Growth: Comment on Kiley.” Econ Journal Watch 20, no. 1 (March 2023): 69–84.

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