Supplementary Notes on Dell, Jones and Olken (2012)

1 Temporary v.s. Permanent Effect

To understand the level effect (temporary effect) and growth effect (permanent effect) of
temperature on economic growth, let’s consider a simple case that gi = 0 and T̄it = 0. In
this case, ∆Ait /Ait = 0 when the temperature is at its average level. In the following analy-
sis, we consider three hypothetical scenarios.

Case I: Temperature remains at T̄it ∀ t

In this case, Ait = Āit ∀ t. Output stays at the same level for all period, i.e., yit = eβ T̄it Āit .
The following figure depicts the time series of yit

• • • • • • • • • • •
-5 -4 -3 -2 -1 0 1 2 3 4 5
t

Case I: No Temperature Shock

Case II: Temperature remains at T̄it ∀ t 6= 0. But there is a negative temperature shock at
period t = 0, i.e., Ti0 < T̄it = 0. The dynamic effects of this temperature shock on output
depend on the underlying parameters β and γ. To see this, let’s consider two sub-cases.

Case II.a: β < 0 and γ = 0

Because γ = 0, productivity remains unchanged across time, Ait = Āit ∀ t. At period 0,
output is yi0 = eβTi0 Āit > yit = eβ T̄it Āit . However, from period t = 1 and on, output reverts
to its original level when temperature reverts to its average level, which is eβ T̄it Āit . The

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following figure depicts the time series of yit . In this case, we say temperature only has level
effect (temporary effect) on economic growth but no growth effect (permanent effect).

• • • • • • • • • •
-5 -4 -3 -2 -1 0 1 2 3 4 5
t

Case II.a: Negative Temperature Shock at t = 0 (β < 0 and γ = 0)

Case II.b: β = 0 and γ < 0

In this case, the time series of productivity growth is given by

 ∆Ait = 0 ∀ t 6= 0


Ait−1

 ∆Ai,0

= γTi,0 > 0 when t = 0

Ai,−1

Hence, the productivity Ait follows the path ... = Ai,−2 = Ai,−1 < Ai,0 = Ai,1 = Ai,2 = ....
Therefore, output also follows the path ... = yi,−2 = yi,−1 < yi,0 = yi,1 = yi,2 = .... In
this case, we say temperature has growth effect (permanent effect) on economic growth. The
following figure depicts the time series of yit . Obviously, the effect temperature shock persists
forever.
• • • • • •
temporary temperature shock will have a permenent effect on productitivity!

• • • • •
-5 -4 -3 -2 -1 0 1 2 3 4 5
t

Case II.b: Negative Temperature Shock at t = 0 (β = 0 and γ < 0)

scar forever!

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2 An Extended Model
Consider the following simple economy:

Yit = eβ0 Tit +β1 Tit−1 Ait Lit (1)

∆Ait
= gi + γ0 Tit + γ1 Tit−1 (2)
Ait−1
where Y is the aggregate output, L measures population, A measures labor productivity
and T measures weather. Equation (1) captures the level effect of weather on production,
e.g., the effect of current temperature (Tit ) and lag period’s temperature (Tit−1 ) on crop
yields. Equation (2) captures the growth effect of weather, e.g., the effect of current and
past temperature on features, such as institutions that influence productivity growth. gi
captures all the time-invariant country-specific factors that affect productivity growth.
PG PG
Denote G be the number of periods. Define T̄it = t=0 Tit /G, T̄it−1 = t=0 Tit−1 /G,
PG
T̄it−2 = t=0 Tit−2 /G. In the following analysis, we assume that when G is sufficiently large,
T̄it = T̄it−1 = T̄it−2

(1) Denote output per capital as yit = Yit /Lit and economic growth rate as git = ∆yit /yit−1 .
Show that the economic growth rate at period t is:

git = gi + (β0 + γ0 )Tit + (−β0 + β1 + γ1 )Tit−1 − β1 Tit−2 (3)

Using the factor

Answer: Take log on both sides of the production function (1):

ln yit = β0 Tit + β1 Tit−1 + ln Ait

Take the first difference and obtain:

ln yit − ln yit−1 = β0 (Tit − Tit−1 ) + β1 (Tit−1 − Tit−2 ) + ln Ait − ln Ait−1

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 ∆yit ∆yit ∆Ait ∆Ait
Using the fact that ln(1 + yit
) ≈ yit
and ln(1 + Ait
) ≈ Ait
, we can rewrite the
above equation as

git = gi + (β0 + γ0 )Tit + (−β0 + β1 + γ1 )Tit−1 − β1 Tit−2

PG
(2) Show that the fundamental growth rate of the ḡit = t=0 git /G is:

ḡit = gi + (γ0 + γ1 )T̄it (4)

Explain intuitively why level effects β0 and β1 disappear from equation (4). What is
the growth effect of temperature?

Answer: Take average across time on both sides of equation (3) and obtain

ḡit = gi + (β0 + γ0 )T̄it + (−β0 + β1 + γ1 )T̄it−1 − β1 T̄it−2

Using the fact that T̄it = T̄it−1 = T̄it−2 , the above equation will boil down to equation
(4).

Intuitively, β0 and β1 capture the level effect of temperature on income. Temperature

fluctuates around the average. As a result its level effects on income level fluctuate
fluctuate around zero. In the long run, the positive and negative impacts cancel out.
Therefore, these level effects don’t affect the long term (fundamental) growth rate of
income.

The growth effect is captured by γ0 + γ1 .

(3) Suppose that you have a panel data that covers I number of countries and G period
of time. Write down a regression model based on the theoretical model (3).

Answer: The regression model that estimate equation (3)

git = θi + ρ0 Tit + ρ1 Tit−1 + ρ2 Tit−2 + εit (5)

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 where θi , ρ0 , ρ1 and ρ2 correspond to gi , (β0 + γ0 ), (−β0 + β1 + γ1 ) and −β1 in equation
(3).

(3) Discuss how will you test the null hypotheses: (i) The immediate effect of temperature
on economic growth is zero; (ii) The growth effect of temperature on economic growth
is zero.

Answer: Based on the regression model (5), we can test the following hypotheses:
(i) H0 : ρ0 = 0 (The immediate effect of temperature on economic growth is zero)
(ii) H0 : ρ0 + ρ1 + ρ2 = 0 (The growth effect of temperature on economic growth is
zero)

Note that ρ0 + ρ1 + ρ2 corresponds to γ0 + γ1 in the theoretical model, which is the

growth effect of temperature. The hypothesis (i) can be tested by t-test, and the
hypothesis (ii) can be tested by F-test.