Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266132 
Year of Publication: 
2022
Series/Report no.: 
Graduate Institute of International and Development Studies Working Paper No. HEIDWP20-2022
Publisher: 
Graduate Institute of International and Development Studies, Geneva
Abstract: 
Colombia is particularly affected by the El Niño Southern Oscillation (ENSO) weather fluctuations. In this context, this study explores how the adverse weather events linked to ENSO affect the inflation expectations in Colombia and how to incorporate these second-round effects into a small open economy New Keynesian model. Using BVARx models we provide evidence that the inflation expectations obtained from surveys and break-even inflation measures are affected by weather supply shocks. Later, using this stylised fact, we modify one of the core forecasting models of the Banco de la República by incorporating the mechanisms in which weather-related shocks affect marginal costs and inflation expectations. We find that ENSO shocks had an important role in both inflation and the dynamics of inflation expectations, and that policymakers should consider this fact.
Subjects: 
Inflation
inflation expectations
inflation expectations anchoring
weather shocks
JEL: 
D84
E31
E52
Q54
Document Type: 
Working Paper

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