The Impact of Temperature Anomalies on Industrial Production

Countries around the world are committed to achieving the Sustainable Development Goals (SDGs). However, significant challenges remain—particularly the economic consequences of climate change. Using a GVAR model for 17 economies over the period 2001M1–2021M12, we explore how temperature anomalies affect industrial production through four potential mechanisms: food prices, credit costs, exchange rates and investment. Our theoretical model demonstrates that temperature anomalies lower agricultural production, which drives up food prices and reduces real wages. This in turn leads to lower investment and production in the industrial sector. Our empirical results indicate that rising temperature anomalies are associated with a decrease in industrial production and investment, as well as the depreciation of domestic currencies relative to the U.S. dollar. Additionally, we observe that the influence of temperature anomalies is more pronounced in hot regions than in cold regions. Our investigation underscores the importance of financial markets and investment as potential transmission channels for the impact of climate change on industrial production. This study provides empirical evidence to support policymaking aimed at mitigating the adverse impacts of climate change, thereby helping countries to advance toward key SDGs such as no poverty, zero hunger, and climate action.