Big News: Climate Change and the Business Cycle

Abstract

News drive expectations about the economy’s future fundamentals. Climate change is big news: it will impact the economy profoundly but the effect will take some time to materialize in full. Climate-change expectations thus offer a unique opportunity to study the impact of news on the business cycle. We measure these expectations in a representative survey of US consumers. Respondents expect not much of an impact on GDP growth, but perceive a high probability of costly, rare disasters—suggesting they are salient of climate change. Furthermore, expectations vary systematically with socioeconomic characteristics, media consumption, various information treatments and over time. We calibrate a New Keynesian model with rare disasters to key results of the survey and find that shifts in climate change expectations operate like demand shocks and cause sizeable business cycle fluctuations.