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Weather shocks and inflation expectations in semi-structural models

Author

Listed:
  • Romero, José Vicente
  • Naranjo-Saldarriaga, Sara

Abstract

Colombia is particularly affected by the El Niño Southern Oscillation (ENSO) weather fluctuations. In this context, this study explores how adverse weather events linked to ENSO affect inflation expectations in Colombia and how to incorporate these second-round effects into a small open economy New Keynesian model. Using BVARx models, we find evidence that inflation expectations – obtained from surveys and break-even inflation measures – are influenced by weather-related supply shocks. Building on this stylized fact, we modify one of the core forecasting models of the Banco de la República to incorporate the mechanisms through which weather-related shocks could affect marginal costs and inflation expectations. We conclude that ENSO shocks play a significant role in influencing both inflation and the dynamics of inflation expectations, a fact that should be considered by policymakers.

Suggested Citation

  • Romero, José Vicente & Naranjo-Saldarriaga, Sara, 2024. "Weather shocks and inflation expectations in semi-structural models," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(2).
    • Handle: RePEc:eee:lajcba:v:5:y:2024:i:2:s2666143823000339
    DOI: 10.1016/j.latcb.2023.100112
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    More about this item

    Keywords

    Inflation; Inflation expectations; Inflation expectations anchoring; Weather shocks;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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