Title page 1

Contents 1

Abstract 2

Non-technical summary 3

1. Introduction 5

1.1. Related Literature 8

2. Baseline Model 10

2.1. Households 10

2.2. Labor Market 11

2.3. Financial Intermediaries 13

2.4. Goods Production 16

2.5. Capital-Producing Firms 19

2.6. Global Economic Activity and Weather 20

2.7. Resource Constraint and Government Policy 20

2.8. Exogenous Shocks 21

2.9. Markov Switching 23

3. Estimation 23

3.1. Data 23

3.2. Calibrated Parameters and Prior Distributions 25

4. Results 25

5. Conclusions 30

References 39

Appendices 43

A. Data 43

B. The Stationary System 47

Acknowledgements 52

Tables 33

Table 1. Prior and posterior distributions in Markov switching model 33

Table 2. GDP growth variance decomposition 34

Figures 35

Figure 1. Smoothed probability 35

Figure 2. Response of observed variables to Actuaries Climate Index 36

Figure 3. Severe weather shocks: channels of transmission 37

Figure 4. Severe weather shocks: ACI components 38

Appendix Figures 46

Figure A1. Observed data 46