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Politics will tear us apart, again. Geopolitical risk, fragmentation, and capital flows

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  • Marco Albori

    (Bank of Italy)

Abstract

This review summarizes empirical research on the impact that geopolitical risk and financial fragmentation have on cross-border capital flows. It distinguishes between event-driven geopolitical risk and structural political divides, showing that both affect international investment through retrenchment and alignment-based reallocation. Using gravity models, the literature documents how political distance increasingly shapes foreign direct investment and portfolio flows, particularly into emerging markets, strategic sectors, and, to some extent in the euro area following the invasion of Ukraine. Open questions include the macroeconomic consequences of financial fragmentation, its impact on the global financial cycle, and the implications for the role of reserve currencies.

Suggested Citation

  • Marco Albori, 2025. "Politics will tear us apart, again. Geopolitical risk, fragmentation, and capital flows," Questioni di Economia e Finanza (Occasional Papers) 974, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_974_25
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism

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