Staff Working Paper No. 1,118
By Davide Brignone, Luca Gambetti and Martino Ricci
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.
Geopolitical risk shocks: when size matters