Coherent shocks: External identification and internal validation with an application to geopolitical risk

Schüler, Yves, Sarah Arndt, Yevheniia Bondarenko, Vivien Lewis and Matthias Rottner

No 21794, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose the concept of coherent shocks: externally identified shocks whose structural interpretation is independently validated within the empirical model. Using textual data, we classify articles by economic mechanism and construct mechanism-specific shock proxies. Our coherence criterion measures the posterior share of impulse-response draws matching the assigned signature, benchmarked against its prior share. Applied to geopolitical risk (GPR), we use a large language model to construct supply-type and demand-type GPR series. Shocks identified from both series are strongly coherent with their assigned signatures. Innovations in the overall GPR index blend the two, and neither recursive nor sign-restriction identification separates them. The criterion applies to any externally identified shock for which theory implies a response signature.

Keywords: shock validation; external identification; Bayesian var; Large Language Models; geopolitical risk (search for similar items in EconPapers)
JEL-codes: C11 C32 E31 E32 F51 (search for similar items in EconPapers)
Date: 2026-07
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