A1890
Title: The effects of temperature shocks on energy prices and inflation in the Euro Area
Authors: Francesco Simone Lucidi - Federico II University (Italy) [presenting]
Abstract: Over the last twenty years, temperature variability has been increasing across Europe, affecting the economy through the demand for energy for heating and cooling needs. The focus is on providing empirical evidence about the existence of an energy transmission channel of temperature shocks to inflation by estimating a vector autoregressive model (VAR) for six Euro-Area countries. Warm and cold spells are studied by starting from grid-level daily meteorological data and proposing a novel sign-restriction identification scheme. Warm spells are more relevant than cold ones because they persistently lower energy prices. The negative impact on energy demand due to persistent positive temperature anomalies suggests that a 'turn-off-heating' effect outweighs the 'turn-on-cooling' in Europe. That effect prevails in Northern countries, where energy inflation without the contribution of temperature anomalies shocks would be higher than the actual one. At the Euro Area level, the overall effect is sizable although limited: the historical contribution of the highest warm spells of 2019 and 2020 accounted for about 0.05\% of missing annual headline inflation and 0.4\% of energy inflation.
