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Geopolitical risk shocks: when the size matters

Author

Listed:
  • Brignone, Davide
  • Gambetti, Luca
  • Ricci, Martino

Abstract

In this paper, we investigate the presence of non-linearities in the transmission of geopolitical risk (GPR) shocks. Our methodology involves incorporating a non-linear function of the identified shock into a VARX model and examining its impulse response functions and historical decomposition. We find that the primary transmission channel of such shocks is associated with heightened uncertainty,which significantly escalates only with substantially large GPR shocks (i.e., above 4 standard deviations). This increase in uncertainty prompts precautionary saving behaviors, exerting a strong impact on consumption and reducing activity. The response of inflation is more subdued, reflecting both diminished demand and heightened uncertainty, which influence prices in opposing directions. JEL Classification: C30, D80, E32, F44, H56

Suggested Citation

  • Brignone, Davide & Gambetti, Luca & Ricci, Martino, 2024. "Geopolitical risk shocks: when the size matters," Working Paper Series 2972, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242972
    Note: 2685107
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    economic activity; geopolitical risk; inflation; uncertainty; vector autoregressions;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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