The effects of temperature and rainfall anomalies on Mexican inflation

TL;DR

This study investigates how temperature and rainfall anomalies influence Mexican inflation, finding that long-term precipitation deviations significantly impact inflation, while temperature deviations do not, with no short-term effects observed.

Contribution

It introduces a panel ARDL approach to measure long-term climate effects on inflation and uses impulse response functions for short-term analysis, focusing on Mexican data.

Findings

Long-term precipitation deviations significantly affect inflation.

Temperature deviations have no significant impact.

No short-term effects of climate shocks on 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.