Climate Change and Macroeconomic Dynamics in Morocco: Assessing Transmission Mechanisms via a Semi-Structural DSGE Model

Abstract

Climate change poses growing macroeconomic risks to economies that are structurally vulnerable and dependent on rainfall.  The literature has largely relied on aggregate measures of productivity or computable general equilibrium models. This approach leaves the underlying transmission mechanisms insufficiently explored. This article examines the macroeconomic implications of climate shocks in Morocco. It focuses on agriculture as the main transmission channel. We develop and estimate a semi-structural dynamic stochastic general equilibrium (DSGE) model covering the period from Q1 2009 to Q4 2022. The results show that an adverse climate shock—a 10% decline in the SPEI index, the climate variable—leads to an immediate 17% contraction in agricultural output. The transmission to the rest of the economy is significantly more moderate. Indeed, non-agricultural output declines by only 1%, and total GDP by 3%. These results can be explained by the potential mobility of production factors, although this mechanism is not explicitly modeled, and agriculture’s relatively small share of GDP. As for inflation, it rises by 3.5%, mainly due to the depreciation of the exchange rate resulting from an accommodative monetary policy. These results highlight sectoral heterogeneity in Morocco’s climate vulnerability. These results underscore the importance of incorporating climate considerations into the design of monetary policy.