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Fair Weather or Foul? The Macroeconomic Effects of El Niño

Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper No. 239. Fair Weather or Foul? The Macroeconomic Effects of El Niño. Paul Cashin, International Monetary Fund; Kamiar Mohaddes, Faculty of Economics and Girton College, University of Cambridge; Mehdi Raissi, International Monetary Fund. May 2015.

“This paper employs a dynamic multi-country framework to analyze the international macroeconomic transmission of El Niño weather shocks. This framework comprises 21 country/region-specific models, estimated over the period 1979Q2 to 2013Q1, and accounts for not only direct exposures of countries to El Niño shocks but also indirect effects through third-markets. We contribute to the climate-macroeconomy literatureby exploitingexogenous variation in El Niño weather events over time, and their impacton differentregions cross-sectionally, to causatively identify the effects of El Niño shockson growth, inflation, energy and non-fuel commodity prices. The results show thatthere areconsiderable heterogeneities in the responses of different countries to El Niñoshocks. WhileAustralia, Chile, Indonesia, India, Japan, New Zealand and South Africa face a short-lived fall in economic activity in response to an El Niño shock, for other countries (including the United States and European region), an El Niño occurrence has a growth-enhancing effect.Furthermore, most countries in our sample experience short-run inflationary pressures as both energy and non-fuel commodity prices increase. Given these findings, macroeconomic policy formulation should take into consideration the likelihood and effects of El Niño weather episodes.”

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