Macroeconomic effects of El Niño diversity: a global vector autoregression (GVAR) approach

Abstract

El Niño diversity is often depicted by the Central Pacific (CP) and Eastern Pacific (EP) El Niño types; these 2 distinct types of El Niño-Southern Oscillation (ENSO) regimes differ in their spatial structure, in their intensity and in the time profile of each event. We applied the global vector autoregression (GVAR) econometric framework to estimate the effects of El Niño diversity on national macroeconomic variables, including gross domestic product (GDP) and consumer price inflation, and global variables, such as world commodity prices and world oil prices. We used quarterly data for the period since ca. 1960, extending quarterly analysis significantly compared to the existing literature. Although the availability of quarterly economic data is limited for this period, we were able to study a set of 26 countries including ones that are directly affected by the El Niño cycle and others that are affected via climate teleconnections. ENSO diversity matters to macroeconomic outcomes; we found that CP El Niño shocks raise CPI inflation and non-oil commodity prices, and generate modest but widespread positive GDP responses across many mid- and high-latitude economies, whereas EP El Niño shocks have much weaker and less systematic effects on inflation, output and commodity prices. The implication of these results is that much of our existing knowledge on the economic effects of the ENSO cycle needs to be revisited to build a more consistent picture across countries and specific historical time periods.