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Geopolitical surprises and macroeconomic shocks: A tale of two events

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  • Anttonen, Jetro
  • Lehmus, Markku

Abstract

We investigate the macroeconomic effects of two recent major geopolitical events on the euro area economy, namely, the outbreak of the Israel-Hamas war and the Russian invasion of Ukraine. To take into account the heterogeneity of geopolitical events, we do not seek to identify a homogeneous geopolitical shock on which to base our causal inference, but construct event-specific combinations of jointly identified macroeconomic shocks instead. To this end, we employ a non-Gaussian structural vector autoregressive model that is statistically identified but also makes use of zero- and sign restrictions and illustrate how different sources of identifying information complement each other. Our results show that adverse geopolitical events may have either inflationary or deflationary effects on indirectly affected economies and that context dependence is required from the monetary authorities when assessing the importance of geopolitical shocks to achieving their price stability objectives.

Suggested Citation

  • 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.
  • Handle: RePEc:zbw:bofrdp:317790
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    More about this item

    Keywords

    structural vector autoregression; statistical identification; monetary policy; inflation; geopolitics;
    All these keywords.

    JEL classification:

    • 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
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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