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This paper is forthcoming in The Review of Economics and Statistics. I would like to thank Neil Ericsson, Caroline Freund, Bill Helkie, Dave Howard, Karen Johnson, Eric Leeper, Andy Levin, John Rosine, Ted Truman, and three anonymous referees for extensive comments on earlier versions of this paper. This paper was written while I was a staff economist at the Board of Governors of the Federal Reserve System. The views expressed in this paper are mine and do not necessarily reflect those held by any member of either institution. I am responsible for any errors.
Debelle and Stevens—using a continuous measure to model Australian output—is one exception.
Other measures of ENSO’s severity include sea-level air temperature and wind speed anomalies.
This paper uses SST and SOI data from 1950 to the present. Although these measures are available intermittently back to the late 1800s, data prior to WWII are not directly comparable to more recent data, and they are often deemed unreliable.
The most recent El Niño paralleled the 1982–83 episode in most respects. La Niñas generally produce climate anomalies that are opposite to those of El Niños.
Since most measures of ENSO are highly correlated, most of the following analysis focuses on just the SST measure. Results using the SOI measure are available upon request.
With the exception of the ENSO measures, all variables were constructed using the IMF’s International Financial Statistics. See Appendix I for a description of the data.
The Schwarz and Akaike Information Criteria yielded the same lag length choice.
The hypothesis of no long-run effect on commodity price levels cannot be rejected.
The only assumption required to calculate these decompositions is that ENSO is weakly (contemporaneously) exogenous with respect to the other three variables in the VAR. As discussed previously, however, this paper models ENSO as strictly exogenous.