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The effects of temperature and rainfall anomalies on Mexican inflation

Arango-Castillo Lenin, Martínez-Ramírez Francisco

Abstract

This paper measures the effects of temperature and precipitation shocks on Mexican inflation using a regional panel. To measure the long-term inflationary effects of climate shocks, we estimate a panel autoregressive distributed lag model (panel ARDL) of the quarterly variation of the price index against the population-weighted temperature and precipitation deviations from their historical norm, computed using the 30-year moving average. In addition, we measure the short-term effects of climate shocks by estimating impulse response functions using panel local projections. The result indicates that, in the short term, the climate variables have no statistical effect on Mexican inflation. However, in the long term, only precipitation norms have a statistical effect, and the temperature norms have no statistical impact. Higher than normal precipitation has a positive and statistically significant effect on Mexican inflation for all items.

The effects of temperature and rainfall anomalies on Mexican inflation

Abstract

This paper measures the effects of temperature and precipitation shocks on Mexican inflation using a regional panel. To measure the long-term inflationary effects of climate shocks, we estimate a panel autoregressive distributed lag model (panel ARDL) of the quarterly variation of the price index against the population-weighted temperature and precipitation deviations from their historical norm, computed using the 30-year moving average. In addition, we measure the short-term effects of climate shocks by estimating impulse response functions using panel local projections. The result indicates that, in the short term, the climate variables have no statistical effect on Mexican inflation. However, in the long term, only precipitation norms have a statistical effect, and the temperature norms have no statistical impact. Higher than normal precipitation has a positive and statistically significant effect on Mexican inflation for all items.

Paper Structure

This paper contains 14 sections, 10 equations, 19 figures, 9 tables.

Table of Contents

  1. Introduction
  2. Literature review
  3. Short- and long-term effects of weather-related events on macroeconomic variables
  4. Short- and long-term effects of weather-related events on Mexican macroeconomic variables
  5. Data
  6. Methodology
  7. Measuring effects of climate anomalies on economic growth
  8. Measuring effects of climate anomalies on inflation
  9. Results
  10. The effects of weather anomalies on real GDP per capita growth
  11. The effects of weather anomalies on inflation
  12. Conclusion
  13. Additional descriptive results
  14. Additional auxiliary results

Figures (19)

  • Figure 1: Quarterly headline CPI inflation rate and quarterly change of total real GDP per capita
  • Figure 2: Historical average of population-weighted temperature and precipitation anomalies.
  • Figure 3: Population-weighted weather anomalies distribution by season.
  • Figure 4: Effect of temperature anomalies shocks on cumulative CPI and its components.
  • Figure 5: Effect of precipitation anomalies shocks on cumulative CPI inflation and its components.
  • ...and 14 more figures