A Bayesian panel VAR model to analyze the impact of climate change on high-income economies

TL;DR

This paper introduces a Bayesian panel VAR model to analyze how climate shocks influence macroeconomic and commodity markets in high-income economies, revealing significant global reactions and regional linkages.

Contribution

It develops a novel Bayesian panel VAR approach with Gaussian mixture and shrinkage priors to model high-dimensional climate-economic relationships.

Findings

Climate shocks cause pronounced global macroeconomic reactions.

Regional climate shifts are strongly linked to global commodity markets.

The model effectively captures complex interdependencies.

Abstract

In this paper, we assess the impact of climate shocks on futures markets for agricultural commodities and a set of macroeconomic quantities for multiple high-income economies. To capture relations among countries, markets, and climate shocks, this paper proposes parsimonious methods to estimate high-dimensional panel VARs. We assume that coefficients associated with domestic lagged endogenous variables arise from a Gaussian mixture model while further parsimony is achieved using suitable global-local shrinkage priors on several regions of the parameter space. Our results point towards pronounced global reactions of key macroeconomic quantities to climate shocks. Moreover, the empirical findings highlight substantial linkages between regionally located climate shifts and global commodity markets.