SMU SOE Lee Kong Chian Seminar in Econometrics (Nov 29, 2021, 10.00am-11.30am): How Does Economic Activity Interact with Climate? A Structural Analysis Using Functional Autoregression

We study feedbacks in the economic-climate system using a mixed autoregression, a mixture of vector autoregression and functional autoregression. Our mixed autoregression involves global distribution of temperature anomalies as a functional variable in addition to other aggregate variables representing economic activity, climate forcings from greenhouse gases and tropospheric aerosols resulting from global sulfur dioxide emissions, and solar and volcanic activities.

We identify three types of output shocks -- emissions-neutral (green), carbon-based (brown), and sulfur-based (yellow) -- and a type of natural climate variation (blue) shock, as well as solar and volcanic shocks. We find that global warming is of anthropogenic nature. Brown shocks are historically the most important driver of global warming, while blue shocks have no eminent effect. Green shocks do not affect climate, and yellow shocks, historically well explained by policies on sulfur emissions, yield uncertain and complicated effects. Green shocks have a significant effect on global economic activity, especially since WWII. Brown shocks, on the other hand, have a smaller effect at impact than green shocks, though the effect gets larger over time. In contrast, yellow shocks unambiguously reduce global output from the outset, and blue shocks are ephemeral but have been reducing output since the 1960's.

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