This study is the first in the country to quantify the contemporaneous and long-term effects of temperature shocks on output growth and other channels of economic activity as well as on inflation, which are the primary considerations of the Bangko Sentral ng Pilipinas in its assessment of the appropriate monetary policy stance.
The study finds that, on average, the short-run marginal impact of a 1-degree Celsius increase in the country’s annual mean temperature reduces aggregate output growth by 0.37 percentage point (ppt). This result is robust and consistent even after introducing other model specifications. The decline in output growth is larger at 0.47 ppt when we control for episodes of El Niño Southern Oscillation (ENSO) events vis-à-vis the 0.30 ppt drop in output growth after controlling for the occurrence of floods and storms. On crop production, the study found that temperature shocks have negative effect on palay and corn but a positive impact on mango production. On sectoral output, the manufacturing and services sectors are negatively affected by an increase in mean temperature, with the magnitude of drop more evident in the manufacturing sector at 1.8 ppt vis-à-vis the 0.7 ppt decrease in the services sector. However, we find that temperature shocks do not significantly affect labor productivity in heat-exposed industries such as construction, transportation, and manufacturing.
Meanwhile, it finds that temperature shocks generate inflationary pressures and remain persistent up to 4 years, with a cumulative increase of 0.77 ppt in headline inflation. On a disaggregated level, the inflationary impact of temperature shocks on food prices is deeper in magnitude and long-lasting in period at 0.79 ppt vis-à-vis the effect on non-food prices, which is rather small at 0.31 ppt and transitory up to 2 years only.