The Macroeconomic Effects of Climate Shocks in Thailand

This paper studies the dynamic impact of climate shocks on economic activity and inflation in Thailand, a developing country susceptible to the effects of climate change. We utilize a Vector Autoregressive (VAR) analysis that accounts for the asymmetric and nonlinear impacts of climate change. Overall, climate shocks are significantly contractionary on output whereas their effect on inflation is rather muted. For output, the impact is more pronounced on the production rather than expenditure side of the economy, although highly persistent climate shocks can have significant effects on demand. Furthermore, we find that the macroeconomic impact of climate change varies significantly across sectors of production as well as components of inflation. Raw food prices, in particular vegetables, are sensitive to climate shocks, consistent with the agricultural sector being most vulnerable, with effects that are more pronounced in the short-run. This contrasts with industrial production and service sectors that experience more persistent effects. We also find that dry versus wet weather conditions deliver varying effects on output and inflation, and we also find that the impact of climate shocks are more severe if extreme weather events are large, as well as sustained for longer periods of time. Finally, utilizing a panel autoregressive distributed lag model (ARDL), we quantify significant differences in the impact of climate shocks on aggregate output across provinces, depending on the provincial level of income as well as its proportion of output tied to agricultural activities.