The Macroeconomic Impact of Droughts in Uruguay: A General Equilibrium Analysis Using the Soil Moisture Deficit Index

Uruguay recently confronted the impact of a once-in-a-century severe drought, which affected key agricultural areas, and caused significant direct losses to the agricultural sector, especially for soybean production and cattle farming - important exports in Uruguay's trade matrix. From October 2022 to April 2023, rainfall was about 47 percent below historical averages, contributing to a decline in agricultural output and impacting overall GDP growth. The frequency of recent climate shocks witnessed in Uruguay combined with its rich climate data make it the ideal candidate to understand if weather shocks matter and through which transmission mechanisms. Using the empirical and theoretical framework outlined in Gallic and Vermandel (2020) we document that weather shocks play an important role in business cycle dynamics in Uruguay.