Macroeconomic effects of weather shocks, 1870-1913

Abstract

This paper considers the influence of weather shocks at a disaggregated level of analysis, modelling the effects of weather shocks on British agriculture, construction and energy demand over the period . The impact of weather shocks will vary from sector to sector as the conditions favouring one activity may be adverse to another. The sectoral effects are aggregated to give us an estimate of the macroeconomic effects of weather on business cycle fluctuations. KEY WORDS: Business cycles · Climate impactResale or republication not permitted without written consent of the publisher 1 Most economists dismiss Jevons' approach to economic cycles as mechanical and simplistic. In fact his theory is neither. Jevons started with the observation that it is not possible to find a solar cycle in European grain prices (Jevons 1884, p. 231). To get a more convincing theory of the British cycle, he considered fluctuations in trade with India, where on average the sunspot cycle is correlated with periodic famines. The demand shocks in India are then transmitted to the British economy via trade links. We are most grateful to a referee of this journal for elaborating this point Clim Res 20: 153-166, 2002 using the available historical sector-specific information for weather and economic data. Secondly, we aggregate the impact effect of weather shocks on the macroeconomy by aggregating the sectoral effects using a national income accounting framework. 2 The choice of Britain as our case study is partly because of data availability. However, it has the added advantage that Britain's unique production structure at the end of the 19th century, with a very small agricultural sector, makes this case study relevant for our understanding of many other economies in the first half of the 20th century. It was not until the 1950s that many other European economies had a comparable sectoral production structure.Historical analyses of the relationship between weather and the economy can help us understand the past and yield insights into how we might expect particular sectors to respond to future climatic shocks. The sectoral-climatic linkages can also help us understand the processes generating sectoral fluctuations, suggesting broader implications for modelling macroeconomic cycles. To the extent that weather shocks have an observable influence on sectoral fluctuations, real supply-side shocks should figure in sectoral business cycle behaviour. The development of modern theories of economic cycles, such as the real business cycle theory, has the potential of allowing for the importance of weather shocks as supply-side shocks to the economy. Much of the recent business cycle literature has emphasised the importance of sectoral technological shocks but has neglected the importance of weather shocks as a complementary explanation.The paper is structured as follows: Sections 2 to 4 consider the effects of weather on agriculture, construction and coal production respectively. In considering these 3 sectors it should be emphasised th...

Tariffs and economic growth in the first era of globalization

“…Low growth in the cyclical depression of the late 1870s-the result of the common effects of financial crises, sudden stops of capital flow affecting some of the periphery and adverse weather conditions in much of Europe (Solomou and Wu 2002)-was correlated with low tariffs in the post Cobden-Chevalier world. When the cyclical recovery came in the 1880s, average tariff levels were higher.…”