Fair Weather or Foul? The Macroeconomic Effects of El Niño

Abstract

This paper employs a dynamic multi-country framework to analyze the international macroeconomic transmission of El Nino 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 Nino shocks but also indirect effects through third-markets. The results of our Global VAR model of the world economy indicate that the economic consequences of El Nino shocks differ across countries. While Australia, Chile, Indonesia, India, Japan, New Zealand and South Africa face a short-lived fall in economic activity in response to an El Nino shock, for other countries, the El Nino shock has a growth-enhancing effect; some (for instance the U.S.) due to direct effects while others (for instance the European region) through positive spillovers from major trading partners. Furthermore, most countries in our sample experience short-run in 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 Nino episodes.