International Finance Discussion Papers (IFDP)
April 1998
El Niño and World Primary Commodity Prices: Warm Water or Hot Air?
Allan D. Brunner
Abstract:
This paper examines the historical effects of El Niño on world prices and economic activity. Although the primary focus is on world real non-oil primary commodity prices, the effects on G-7 consumer price inflation and GDP growth are also considered. This paper has several distinct advantages over previous studies. First, several econometric models are estimated using fairly broad measures of prices and economic activity. Second, the models include continuous measures of El Niño intensity (sea surface temperature and sea-level air pressure anomalies in the Pacific Ocean) rather than dummy variable measures. Finally, confidence intervals are constructed for all estimated effects of El Niño on world prices and economic activity.
The analysis indicates that El Niño has economically-important and statistically-significant effects on world real commodity prices. A one-standard-deviation surprise in El Niño, for example, raises real commodity price inflation about 3-1/2 to 4 percentage points. Moreover, El Niño appears to account for over 20 percent of commodity price inflation movements over the past several years. El Niño also has some explanatory power for world consumer price inflation and world economic activity, accounting for about 10 to 15 percent of movements in those variables.
Keywords: El Niño, commodity prices, business cycle fluctuations
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.