A non-linear analysis of the Phillips curve for Mexican agricultural prices under different climatic scenarios built based on the ENSO climatic pattern

Abstract

Extreme weather scenarios, like high and low temperature and precipitation levels, affect the economy in different ways, especially those heavily dependent on agricultural activities and that experience a lack of technological buffers against climate change. The ENSO phenomenon is considered one of the most important climatic patterns studied due to its global effects. In the Mexican case, the ENSO patterns have a significant effect on the economy. This research assesses the relationship between agricultural inflation and economic activity, specifically, an aggregate demand shock, under two different weather scenarios by using a non-linear local projection model. Significant differences in the inflation dynamic are found depending on the weather regime. In general, under abnormal weather conditions, the inflationary effect of a positive aggregate demand shock is higher than under a neutral weather regime. Namely, under an abnormal weather regime, a 1% IGAE shock generates an inflationary effect 70 bp higher than under a neutral one. The above indicates that if agricultural inflation has averaged 6% during the last years, then under adverse weather conditions agricultural inflation would be 6.7%, approximately.