Measuring Geopolitical Risk

66 Pages Posted: 7 Feb 2018

See all articles by Dario Caldara

Dario Caldara

Board of Governors of the Federal Reserve System

Matteo Iacoviello

Board of Governors of the Federal Reserve System

Date Written: 2018-02-02

Abstract

We present a monthly indicator of geopolitical risk based on a tally of newspaper articles covering geopolitical tensions, and examine its evolution and effects since 1985. The geopolitical risk (GPR) index spikes around the Gulf War, after 9/11, during the 2003 Iraq invasion, during the 2014 Russia-Ukraine crisis, and after the Paris terrorist attacks. High geopolitical risk leads to a decline in real activity, lower stock returns, and movements in capital flows away from emerging economies and towards advanced economies. When we decompose the index into threats and acts components, the adverse effects of geopolitical risk are mostly driven by the threat of adverse geopolitical events. Extending our index back to 1900, geopolitical risk rose dramatically during the World War I and World War II, was elevated in the early 1980s, and has drifted upward since the beginning of the 21st century.

Keywords: Geopolitical Risk, Economic Uncertainty, War, Terrorism, Business Cycles

JEL Classification: C1, D80, E32, H56

Suggested Citation

Caldara, Dario and Iacoviello, Matteo, Measuring Geopolitical Risk (2018-02-02). FRB International Finance Discussion Paper No. 1222. Available at SSRN: https://ssrn.com/abstract=3117773 or http://dx.doi.org/10.17016/IFDP.2018.1222

Dario Caldara (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Matteo Iacoviello

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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