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, Endogenous growth