Climate change and economic policy uncertainty: Evidence from major countries around the world

Abstract

Countries have implemented a series of economic policies to address the economic threats arising from climate change. We investigate the impact of climate change on economic policy uncertainty and explore the mechanisms and heterogeneity of the impact by constructing the grid area-weighted average temperatures based on monthly panel data of 20 major global economies during 1997–2017. We find that climate change exacerbates economic policy uncertainty. These findings still hold after the robustness test by adjusting the control variables, replacing core explanatory variables and replacing fixed effects. More interestingly, splitting the sample into country groups reveals a considerable contrast in the impact of climate change on economic policy uncertainty. The coefficient on climate change is statistically significant in the case of developing economies, economies with hot climates, low level of trade openness, strong climate impact and high level of corruption. In addition, climate change leads to higher levels of economic policy uncertainty through, reducing economic growth, widening income disparities, increasing inflationary pressures and unemployment rate. This study provides a new perspective for understanding the economic consequences of climate change and policy implications for dealing with climate risks.