Geopolitical risk shocks: when size matters

Davide Brignone (), Luca Gambetti () and Martino Ricci ()
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Davide Brignone: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Luca Gambetti: Universitat Autònoma de Barcelona, BSE, Università di Torino and CCA
Martino Ricci: European Central Bank

No 1118, Bank of England working papers from Bank of England

Abstract: In this paper, we investigate the economic effects of geopolitical risk (GPR) shocks, with a focus on non‑linear transmission mechanisms. Using a VARX framework, we show that larger positive shocks have a disproportionately greater impact, pointing to the existence of an amplification channel driven by rising uncertainty. Large GPR shocks trigger precautionary behaviours, leading to sharp declines in consumption and equity prices. In contrast, prices react positively but the responses are overall muted due to offsetting forces from reduced demand and heightened uncertainty. We further show that GPR shocks linked to anticipated geopolitical threats exhibit pronounced non‑linearities, significantly increasing oil prices and inflation expectations, thereby exerting upward pressure on domestic prices.

Keywords: Geopolitical risk; non-linearities; inflation; vector autoregressions; uncertainty (search for similar items in EconPapers)
JEL-codes: C30 D80 E32 F44 H56 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-02-21
New Economics Papers: this item is included in nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1118

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