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

_IMF Working Papers, May 23, 2025_

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**Canonical URL:** [QPM-Based Analysis of Weather Shocks and Monetary Policy in Developing Countries](https://www.imf.org/en/publications/wp/issues/2025/05/23/qpm-based-analysis-of-weather-shocks-and-monetary-policy-in-developing-countries-565824)

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## Bibliographic details
- Authors: Valeriu Nalban, Luis-Felipe Zanna
- Published: May 23, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229006279.001

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### Overview and central findings
- Weather-related shocks are of a supply-side nature and therefore present significant challenges for monetary policy.
- Using a Quarterly Projection Model (QPM) framework, the 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.
- Overall conclusion: the extent of economic characteristics and frictions in developing countries render them more vulnerable and constitute bigger challenges in monetary policy conduct relative to developed economies.

### Analytical framework and exercises
- Framework: Quarterly Projection Model (QPM).
- The exercises are designed to illuminate how weather shocks propagate through the economy and interact with monetary policy trade-offs.
- Focus areas in the exercises include:
  - transmission channels from agricultural supply disruptions to prices and output,
  - role of exchange rate flexibility and monetary policy framework features,
  - interaction between supply shocks and inflation dynamics in a QPM environment.

### Key economic characteristics and frictions emphasized
- Weight of food expenditures in the consumption basket.
- GDP share of the agriculture sector.
- Degree of imports substituting for the damaged domestic agricultural supply.
- Extent of inflation expectations’ anchoring and central bank credibility.
- Specific characteristics of the monetary policy framework, including:
  - degree of exchange rate flexibility,
  - definition of the price stability objective.

### Policy trade-offs and implications for monetary policy
- Weather shocks, being supply-side, create trade-offs for monetary policy between stabilizing inflation and supporting output.
- The importance of central bank credibility and the anchoring of inflation expectations in mitigating adverse effects from supply shocks is highlighted.
- The degree of exchange rate flexibility and the exact price stability objective influence how monetary policy can respond to weather-induced supply shocks.

### Subject tags and keywords (as presented)
- 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

*Source: QPM-Based Analysis of Weather Shocks and Monetary Policy in Developing Countries, Valeriu Nalban and Luis-Felipe Zanna, May 23, 2025, IMF Working Paper.*

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_Source: https://www.imf.org/en/publications/wp/issues/2025/05/23/qpm-based-analysis-of-weather-shocks-and-monetary-policy-in-developing-countries-565824_