Droughts, Floods and Financial Distress in the United States
The relationships among the weather, agricultural markets, and financial markets have long been of interest to economic historians, but relatively little empirical work has been done. We push this literature forward by using modern drought indexes, which are available in detail over a wide area and for long periods of time to perform a battery of tests on the relationship between these indexes and sensitive indicators of financial stress. The drought indexes were devised by climate historians from instrument records and tree rings, and because they are unfamiliar to most economic historians and economists, we briefly describe the methodology. The financial literature in the area can be traced to William Stanley Jevons, who connected his sun spot theory to rainfall patterns. The Dust bowl of the 1930s brought the climate-finance link to the attention of the general public. Here we assemble new evidence to test various hypotheses involving the impact of extreme swings in moisture on financial stress.
The authors thank conference participants, David Stahle and Henri Grissino-Mayer for comments and suggestions. We also thank Scott A. Redenius who was kind enough to share his estimates of the rates of return to bank equity. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Droughts, Floods and Financial Distress in the United States, John Landon-Lane, Hugh Rockoff, Richard H. Steckel. in The Economics of Climate Change: Adaptations Past and Present, Libecap and Steckel. 2011