Drought shocks and the Paraguayan macroeconomy: A Bayesian SVAR Analysis

Abstract

Droughts pose a major threat for most countries around the globe due to spillover effects on the economy. A Bayesian structural vector autoregressive model estimates the impact of drought shocks on the real business cycle of the Paraguayan economy. A one standard deviation increase in the drought index (0.76%) leads to significant peak declines in output (-0.8%) and investment (-2.5%) two quarters later. Consumption exhibits a contemporaneous decline (-0.6%), while the trade balance remains unresponsive. These findings offer insights for policymakers seeking to understand and mitigate the economic consequences of droughts in Paraguay.