The effects of weather shock on income inequality: evidence from Asia-Pacific Economic Cooperation (APEC) member economies

Abstract

This study empirically investigates the dynamic effects of weather shock on within-country income inequality. Using panel data of 17 Asia-Pacific Economic Cooperation (APEC) member economies, we estimate impulse responses via the local projection method. Moreover, temperature and precipitation shocks, defined as deviations of temperature and precipitation from their historical norms, are exploited to measure country-specific weather shocks. The empirical results reveal the following. First, temperature and precipitation shocks deteriorate income inequality measured by the Gini index; these effects are long-lasting. Moreover, asymmetric effects exist: heat waves and droughts more significantly increase income inequality than cold waves and floods. Lastly, current redistribution policies do not seem to effectively mitigate those adverse effects.