Politics will tear us apart, again. Geopolitical risk, fragmentation, and capital flows

Marco Albori ()
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Marco Albori: Bank of Italy

No 974, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This review summarizes empirical research on the impact that geopolitical risk and financial fragmentation have on cross-border capital flows. It distinguishes between event-driven geopolitical risk and structural political divides, showing that both affect international investment through retrenchment and alignment-based reallocation. Using gravity models, the literature documents how political distance increasingly shapes foreign direct investment and portfolio flows, particularly into emerging markets, strategic sectors, and, to some extent in the euro area following the invasion of Ukraine. Open questions include the macroeconomic consequences of financial fragmentation, its impact on the global financial cycle, and the implications for the role of reserve currencies.

Keywords: foreign direct investment; portfolio investment; capital flows; geopolitics; globalization (search for similar items in EconPapers)
JEL-codes: F21 F36 F52 (search for similar items in EconPapers)
Date: 2025-10
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_974_25

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