Climate Change and Economic Dynamics: Temperature-dependent Shock Propagation

The gradual rise in temperatures motivates conceptualizing climate change as a phenomenon shaping the propagation of macroeconomic shocks, rather than as an independent shock. We formalize this in a theoretical model, showing that climate change induces a structural shift by steepening the aggregate supply curve, exacerbating the price effects of demand shocks while dampening the output response. Our empirical evidence is consistent with this prediction: higher temperatures raise the share of inflation variation attributable to demand shocks by up to 10 percentage points, underscoring the role of climate change in intensifying stagflationary dynamics rather than independently driving business cycles.