IMF Working Papers

QPM-Based Analysis of Weather Shocks and Monetary Policy in Developing Countries

By Valeriu Nalban, Luis-Felipe Zanna

May 23, 2025

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Valeriu Nalban, and Luis-Felipe Zanna. "QPM-Based Analysis of Weather Shocks and Monetary Policy in Developing Countries", IMF Working Papers 2025, 095 (2025), accessed June 19, 2025, https://doi.org/10.5089/9798229006279.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Weather-related shocks are of a supply-side nature and therefore present significant challenges for monetary policy. Using a Quarterly Projection Model (QPM) framework, this paper provides an overview of weather-relevant analytical exercises that help to understand the propagation channels of these shocks, the policy trade-offs they imply, and the ensuing implications for the conduct of monetary policy. The exercises highlight the important role of economic characteristics and frictions, such as the weight of food expenditures in the consumption basket, the GDP share of the agriculture sector, the degree of imports substituting for the damaged domestic agricultural supply, the extent of inflation expectations’ anchoring and central bank credibility, and the specific characteristics of the monetary policy framework, including the degree of exchange rate flexibility and the definition of the price stability objective. Overall, the extent of these characteristics and frictions in developing countries render them more vulnerable and constitute bigger challenges in monetary policy conduct relative to developed economies.

Subject: Exchange rate arrangements, Exchange rates, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Monetary policy frameworks, Prices

Keywords: Central bank credibility, Developing Countries, Exchange rate arrangements, Exchange rates, Food inflation Phillips curve shock, Inflation, Inflation expectation, Inflation targeting, Monetary Policy, Monetary policy credibility, Monetary policy frameworks, Policy trade-off, Quarterly Projection Model, Sub-Saharan Africa, Transmission Mechanism, Weather shock, Weather Shocks

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