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Geopolitical Risk and Inflation: The Role of Energy Markets

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  • Marco Pinchetti

    (Bank of England
    Centre for Macroeconomics (CFM))

Abstract

Episodes characterized by heightened geopolitical tensions are often associated with adverse developments in energy markets, and particularly in oil markets. This paper investigates the consequences of different classes of geopolitical risk shocks for inflation and economic activity, focusing on the role of energy markets. By exploiting the comovement of the Caldara and Iacoviello (2022) GPR index and oil prices around selected episodes via high-frequency sign restrictions a la Jarocinski and Karadi (2020) and narrative sign restrictions a la Antolin-Diaz and Rubio-Ramirez (2018), the paper disentangles the impact of geopolitical shocks associated with disruptions on energy markets from geopolitical shocks associated with economic contractions unrelated to energy markets. These two classes of shocks are associated with distinct macro consequences. A positive surprise in the GPR index associated with geopolitical macro shocks is on average contractionary and deflationary. On the other hand, a positive surprise in the GPR index associated with geopolitical energy shocks is on average contractionary and inflationary. The identification strategy is validated at sector-level by exploiting the heterogeneity in the response of 57 sectors of the US economy to different classes of geopolitical shocks. Sectors characterized by higher energy intensity are subject to larger output losses and price increases in response to geopolitical energy shocks, while the same does not hold in response to geopolitical macro shocks.

Suggested Citation

  • Marco Pinchetti, 2024. "Geopolitical Risk and Inflation: The Role of Energy Markets," Discussion Papers 2431, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2431
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    Cited by:

    1. Brignone, Davide & Gambetti, Luca & Ricci, Martino, 2024. "Geopolitical risk shocks: when size matters," Working Paper Series 2972, European Central Bank.
    2. Antoine Cornevin, 2025. "Geopolitical Risks and Economic Expectations: The Role of Trade Linkages," IHEID Working Papers 11-2025, Economics Section, The Graduate Institute of International Studies.
    3. Anttonen, Jetro & Lehmus, Markku, 2025. "Geopolitical surprises and macroeconomic shocks: A tale of two events," Bank of Finland Research Discussion Papers 5/2025, Bank of Finland.

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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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