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A Gravity Model of Geopolitics and Financial Fragmentation

Author

Listed:
  • Mr. Mario Catalan
  • Mr. Salih Fendoglu
  • Tomohiro Tsuruga

Abstract

Do geopolitical tensions between countries influence the cross-border asset allocation of investment funds? Our answer is yes. We estimate gravity models and find that investment funds allocate smaller shares of their portfolios to recipient countries that are geopolitically more distant to their country of origin—with geopolitical distance measured by dissimilarity in countries’ voting behavior in the United Nations General Assembly. We also find an investment diversion effect: a recipient country attracts additional investments when its source countries get geopolitically more distant to third-party countries. These results are robust to instrumenting geopolitical distance and using alternative distance measures.

Suggested Citation

  • Mr. Mario Catalan & Mr. Salih Fendoglu & Tomohiro Tsuruga, 2024. "A Gravity Model of Geopolitics and Financial Fragmentation," IMF Working Papers 2024/196, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/196
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    Cited by:

    1. Gopinath, Gita & Gourinchas, Pierre-Olivier & Presbitero, Andrea F. & Topalova, Petia, 2025. "Changing global linkages: A new Cold War?," Journal of International Economics, Elsevier, vol. 153(C).
    2. Swapan-Kumar Pradhan & Viktors Stebunovs & Elod Takats & Judit Temesvary, 2025. "Geopolitics meets monetary policy: decoding their impact on cross-border bank lending," BIS Working Papers 1247, Bank for International Settlements.
    3. Florencia Airaudo & Francois de Soyres & Keith Richards & Ana Maria Santacreu, 2025. "Measuring Geopolitical Fragmentation: Implications for Trade, Financial Flows, and Economic Policy," Working Papers 2025-006, Federal Reserve Bank of St. Louis.

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