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Coherent shocks: External identification and internal validation with an application to geopolitical risk

Author

Listed:
  • Schüler, Yves
  • Arndt, Sarah
  • Bondarenko, Yevheniia
  • Lewis, Vivien
  • Rottner, Matthias

Abstract

We propose the concept of coherent shocks: externally identified shocks whose structural interpretation is independently validated within the empirical model. Using textual data, we classify articles by economic mechanism and construct mechanism-specific shock proxies. Our coherence criterion measures the posterior share of impulse-response draws matching the assigned signature, benchmarked against its prior share. Applied to geopolitical risk (GPR), we use a large language model to construct supply-type and demand-type GPR series. Shocks identified from both series are strongly coherent with their assigned signatures. Innovations in the overall GPR index blend the two, and neither recursive nor sign-restriction identification separates them. The criterion applies to any externally identified shock for which theory implies a response signature.

Suggested Citation

  • Schüler, Yves & Arndt, Sarah & Bondarenko, Yevheniia & Lewis, Vivien & Rottner, Matthias, 2026. "Coherent shocks: External identification and internal validation with an application to geopolitical risk," CEPR Discussion Papers 21794, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21794
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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