Geopolitical risk shocks: when the size matters

Davide Brignone, Luca Gambetti and Martino Ricci

No 2972, Working Paper Series from European Central Bank

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

Keywords: economic activity; geopolitical risk; inflation; uncertainty; vector autoregressions (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-opm and nep-rmg
Note: 2685107
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242972

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