Geopolitical surprises and macroeconomic shocks: A tale of two events

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.