Persistent Temperature, Capital Structure, and the Long-Run Level of Output

IMF Working Papers, June 12, 2026

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Canonical URL: Persistent Temperature, Capital Structure, and the Long-Run Level of Output

Research question: How does separating persistent (permanent) temperature changes from transitory weather fluctuations affect estimates of the macroeconomic costs of warming?
Central claim: Separating a permanent temperature component from transitory weather fluctuations reshapes the understanding of long-run output losses from warming; a one-degree Celsius higher permanent temperature is associated with a significant decline in the long-run level of output, with full adjustment unfolding over multiple decades to a century.

Temperature decomposition:
- Uses a Kalman filter state-space decomposition to separate temperature into a permanent component and transitory weather fluctuations.
Empirical framework:
- Links the permanent temperature component to trend output using a panel cointegration and error-correction framework.
Output decomposition:
- Decomposes aggregate output into population and output per capita to identify channels of long-run losses.

Long-run level of output:
- "A one-degree Celsius higher permanent temperature is associated with a significant decline in the long-run level of output, with full adjustment unfolding over multiple decades to a century."
Channels of adjustment:
- In the full sample, long-run output losses operate primarily through demographic adjustment (population).
- In advanced economies, both long-run output per capita and population decline as the climate warms.
Role of capital structure:
- Economies with higher capital intensity and more durable capital stocks experience larger long-run per capita output losses.
Distribution of vulnerability:
- Long-run economic vulnerability to persistent warming is more broadly distributed across rich and poor countries than the short-run weather literature implies, reflecting differences in capital structure.
Relationship to existing literature:
- These findings complement rather than contradict the well-established finding that developing countries are more exposed to short-run weather shocks.

Distinguish persistent temperature trends from transitory weather when estimating macroeconomic impacts of warming.
Account for demographic channels (population changes) when projecting long-run output losses from persistent warming.
Consider capital structure (capital intensity and capital durability) as an important determinant of long-run per capita vulnerability to warming.
Reassess the geographic distribution of long-run climate vulnerability; both advanced and developing economies can face significant long-run losses depending on capital structure.