Bank of Lithuania
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2018-06-28

No 9. Michael Donadelli, Patrick Grüning, Marcus Jüppner, Renatas Kizys. Global temperature, R&D expenditure, and growth

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We shed new light on the macroeconomic effects of rising temperatures. In the data, a shock to global temperature dampens research and development (R&D) expenditure growth. This novel empirical evidence is rationalised within a stochastic endogenous growth model. In the model, Temperature shocks undermine economic growth via a drop in R&D. Moreover, temperature risk generates welfare costs of 13.50% of lifetime utility. The government can offset these welfare costs by subsidizing investment with 1.02% or R&D expenditure with 0.52% of total public spending, respectively. Alternatively, it can levy a lump-sum tax on households which finances 0.64% of total public spending.

JEL Codes: E30, G12, Q00.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Michael Donadelli, Patrick Grüning, Marcus Jüppner, Renatas Kizys, Global temperature, Endogenous growth, R&D expenditure, Welfare costs