The Relationship Between Temperatures, Electricity Consumption, and Business Cycles in Mexico

Abstract

Abstract This research uses the X-13 ARIMA methodology to investigate the co-movement, persistence, and volatility of business cycles, electricity consumption, and temperatures in Mexico during the period 2003.I–2019.IV. Theoretically, electricity consumption sustains a direct but non-linear relationship with economic development and temperatures because it is affected by seasonal factors. The greater the volume of economic activity, the greater the demand for electrical energy. Furthermore, extreme weather increases demand for electricity. During extreme weather seasons, electricity consumption is accentuated due to the greater fluctuation in the electricity supply. Our study finds that electricity consumption is procyclical––with regard to the business cycle––but maximum and minimum temperatures are countercyclical. Meanwhile, the link between minimum temperature and business cycle shows the greatest volatility, indicating that extreme cold represents a more significant risk factor than extreme heat. Furthermore, the duration of fluctuations is not significant, a result explained by the seasonality of the temperature. These findings enable the conclusion that temperatures have substantial effects on economic development and electricity supply. This leads to some policy recommendations that might address future electricity demand.