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The Impact of Geopolitical Risk on Consumer Expectations and Spending

Author

Listed:
  • Gorodnichenko, Yuriy

    (University of California, Berkeley)

  • Georgarakos, Dimitris

    (European Central Bank)

  • Kenny, Geoff

    (European Central Bank)

  • Coibion, Olivier

    (University of Texas at Austin)

Abstract

Using novel scenario-based survey questions that randomize the expected duration of the Russian invasion of Ukraine and Middle East conflict, we examine the causal impact of geopolitical risk on consumers’ beliefs about aggregate economic conditions and their own financial outlook. Expecting a longer conflict leads European households to anticipate a worsening of the aggregate economy, with higher inflation, lower economic growth, and lower stock prices. They also perceive negative fiscal implications, anticipating higher government debt and higher taxes. Ultimately, households view the geopolitical conflict as making them worse off financially and it leads them to reduce their consumption.

Suggested Citation

  • Gorodnichenko, Yuriy & Georgarakos, Dimitris & Kenny, Geoff & Coibion, Olivier, 2025. "The Impact of Geopolitical Risk on Consumer Expectations and Spending," IZA Discussion Papers 18084, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp18084
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    References listed on IDEAS

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    1. Janet Hua Jiang & Rupal Kamdar & Kelin Lu & Daniela Puzzello, 2024. "How Do Households Respond to Expected Inflation? An Investigation of Transmission Mechanisms," Staff Working Papers 24-44, Bank of Canada.
    2. Peter Andrebriq & Carlo Pizzinelli & Christopher Roth & Johannes Wohlfart, 2022. "Subjective Models of the Macroeconomy: Evidence From Experts and Representative Samples," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 2958-2991.
    3. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio & Kenny, Geoff, 2025. "Wealth shocks and portfolio choice," Journal of Monetary Economics, Elsevier, vol. 149(C).
    4. Roberto Colarieti & Pierfrancesco Mei & Stefanie Stantcheva, 2024. "The How and Why of Household Reactions to Income Shocks," NBER Working Papers 32191, National Bureau of Economic Research, Inc.
    5. Anna Lipinska & Musa Orak, 2020. "Real Effects of Uncertainty: Evidence from Brexit," FEDS Notes 2020-05-11, Board of Governors of the Federal Reserve System (U.S.).
    6. Georgarakos, Dimitris & Kenny, Geoff, 2022. "Household spending and fiscal support during the COVID-19 pandemic: Insights from a new consumer survey," Journal of Monetary Economics, Elsevier, vol. 129(S), pages 1-14.
    7. Dimitris Georgarakos & Yuriy Gorodnichenko & Olivier Coibion & Geoff Kenny, 2025. "The Causal Effects of Inflation Uncertainty on Households' Beliefs and Actions," IMES Discussion Paper Series 25-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
    8. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 823-866.
    9. Dimitris Georgarakos & Yuriy Gorodnichenko & Olivier Coibion & Geoff Kenny, 2024. "The Causal Effects of Inflation Uncertainty on Households' Beliefs and Actions," NBER Working Papers 33014, National Bureau of Economic Research, Inc.
    10. Mary A. Burke & Ali Ozdagli, 2023. "Household Inflation Expectations and Consumer Spending: Evidence from Panel Data," The Review of Economics and Statistics, MIT Press, vol. 105(4), pages 948-961, July.
    11. Olena Kostyshyna & Luba Petersen, 2024. "The Effect of Inflation Uncertainty on Household Expectations and Spending," NBER Working Papers 32939, National Bureau of Economic Research, Inc.
    12. Georgarakos, Dimitris & Kenny, Geoff, 2022. "Household spending and fiscal support during the pandemic – the role of public perceptions," Research Bulletin, European Central Bank, vol. 94.
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    Keywords

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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F5 - International Economics - - International Relations, National Security, and International Political Economy

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