Extreme Hydrometeoroligal Shocks and Inflation: Evidence from Costa Rica

David Ching-Vindas (), Catalina Sandoval-Alvarado () and Carlos Segura-Rodriguez ()
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David Ching-Vindas: Department of Economic Research, Central Bank of Costa Rica
Catalina Sandoval-Alvarado: Department of Economic Research, Central Bank of Costa Rica
Carlos Segura-Rodriguez: Department of Economic Research, Central Bank of Costa Rica

No 2608, Documentos de Trabajo from Banco Central de Costa Rica

Abstract: In this paper, we analyze the effect of extreme hydrometeorological events on inflation in Costa Rica (2010–2025). We use precipitation data from “Climate hazards Center InfraRed Precipitation with Stations"(CHIRPS) to define extreme wet and dry shocks based on the historical 95th and 5th percentiles, respectively. We use the local projections method applied to an augmented Phillips curve to estimate impulse response functions from these shocks over a 12-month horizon. The results reveal significant asymmetric effects: wet events cause an immediate but transitory increase in prices, particularly in agricultural sub-indices, followed by a downward correction, whereas dry events generate a gradual increase that becomes statistically significant with a longer lag. Furthermore, we identify spatial heterogeneity by clustering municipalities according to their climate anomaly patterns. Finally, we find that the occurrence of consecutive extreme events amplifies the shock’s effect and its persistence, and quantile regressions confirm pronounced tail inflationary risks at the 90th percentile of the conditional distribution. These findings highlight the need to employ disaggregated climate data and explicitly incorporate their effects into macroeconomic forecasting models. ***Resumen: Este trabajo analiza los efectos de los eventos hidrometeorológicos extremos sobre la inflación en Costa Rica (2010–2025). Se utilizan datos de precipitación del sistema “Climate Hazards Center Infra Red Precipitation with Stations"(CHIRPS) para definir choques extremos lluviosos y secos a partir de los percentiles históricos 95 y 5, respectivamente. Mediante el método de proyecciones locales aplicado a una curva de Phillips ampliada, se estiman funciones impulso respuesta de estos choques para un horizonte de 12 meses. Los resultados revelan efectos asimétricos significativos: los extremos lluviosos provocan un incremento inmediato pero transitorio en los precios, especialmente en subíndices agropecuarios, seguido de una corrección a la baja, mientras que los eventos secos generan un aumento gradual que se vuelve estadísticamente significativo con mayor rezago. Adicionalmente, se identifica heterogeneidad espacial mediante el agrupamiento de cantones según sus patrones de anomalías climáticas. Finalmente, se encuentra que la ocurrencia de eventos extremos consecutivos amplifica el efecto del choque y su persistencia, y las regresiones cuantílicas confirman riesgos inflacionarios de cola pronunciados en el percentil 90 de la distribución condicional. Estos hallazgos evidencian la necesidad de emplear datos climáticos desagregados e incorporar explícitamente sus efectos en los modelos de pronostico macroeconómico.

Keywords: Extreme hydrometeorological events; inflation; local projections; non-linearities; Eventos hidrometereológicos extremos; inflación; proyecciones locales; no linealidades. (search for similar items in EconPapers)
JEL-codes: E31 E37 Q54 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:apk:doctra:2608

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