Inflation dynamics under different weather regimes: Evidence from Mexico

In countries with substantial agricultural sectors, such as Mexico, extreme weather conditions linked to the El Niño-Southern Oscillation (ENSO) wield significant influence. This study focuses on Mexico, examining how ENSO affects the interplay between headline inflation (excluding energy) and econo...

Full description

Saved in:
Bibliographic Details
Published in:Ecological economics 2024-06, Vol.220, p.108179, Article 108179
Main Authors: Ventosa-Santaulària, Daniel, Tapia, Edwin, Pérez-Peña, Anna Karina
Format: Article
Language:English
Subjects:
Economic activity
El Niño
ENSO
Inflation
La Niña
Monetary policy
Nonlinear local projections
Citations: Items that this one cites
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:In countries with substantial agricultural sectors, such as Mexico, extreme weather conditions linked to the El Niño-Southern Oscillation (ENSO) wield significant influence. This study focuses on Mexico, examining how ENSO affects the interplay between headline inflation (excluding energy) and economic activity. Employing a nonlinear local projection within two weather scenarios – acute and neutral – we uncover a notable disparity in inflationary dynamics. Notably, amidst acute weather conditions, a 1% shock in the output gap triggers a cumulative inflationary effect (over a 12-month horizon) 0.90% higher than under neutral environmental states. This discrepancy deviates inflation from Mexico’s Central Bank target because of supply constraints and demand pressures which mainly affect agricultural inflation. The results emphasize the urgency of incorporating environmental factors into inflation risk assessment for more informed monetary policy decisions. Additionally, this approach aids in isolating environmental influences from other inflation drivers.
ISSN:0921-8009
1873-6106
DOI:10.1016/j.ecolecon.2024.108179