The Macroeconomic Effects of Extreme Weather Events in Spain: A High-Frequency, Regional Approach

<p>Europe is already feeling the effects of a rapidly warming climate. Higher temperatures and severe floods, windstorms and wildfires have become defining features of recent years. But what this means for macroeconomic stability and policy is not fully understood. To shed more light on how extreme weather events affect the economy, we combine macroeconomic data at the most detailed regional level and at the highest temporal frequency available with high-resolution meteorological information for Spain’s continental provinces (NUTS-3 regions) from 2000 to 2022. This approach addresses the identification constraints and aggregation biases that have limited previous evidence. Panel local projections show that floods and windstorms trigger substantial and persistent contractions in real regional output per capita, while effects of wildfires are more limited. Extending our analysis to state-dependent local projections, we find that regions with high capital density, limited fiscal space or low insurance coverage see deeper and more persistent output declines, especially after floods. Thus, the effects of extreme weather events are genuine macroeconomic shocks in terms of their size and persistence. Sustained reconstruction support, broader insurance coverage, and targeted adaptation measures are hence crucial to increase macroeconomic resilience in the face of rising climate risks.</p>