Geopolitical Risk Shocks: When the Size Matters

44 Pages Posted: 8 Aug 2024

See all articles by Davide Brignone

Davide Brignone

Bank of England; University of Rome Tor Vergata

Luca Gambetti

Universitat Autonoma de Barcelona

Martino Ricci

European Central Bank (ECB)

Date Written: August, 2024

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.

Keywords: economic activity, geopolitical risk, inflation, uncertainty, vector autoregressions

JEL Classification: C30, D80, E32, F44, H56

Suggested Citation

Brignone, Davide and Gambetti, Luca and Ricci, Martino, Geopolitical Risk Shocks: When the Size Matters (August, 2024). ECB Working Paper No. 2024/2972, Available at SSRN: https://ssrn.com/abstract=4919668

Davide Brignone (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

University of Rome Tor Vergata ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

Luca Gambetti

Universitat Autonoma de Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

Martino Ricci

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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