Geopolitical risks and inflation
In this paper, Caldara et al. explore the impact of geopolitical risk on inflation. They use a dataset that covers 44 countries (17 advanced economies and 27 emerging economies) from 1900 through 2021 and includes country-level measures of inflation and GDP, as well as four additional economic indicators: national military expenditure, public debt to GDP, ratios, trade to GDP ratios, and money growth. In addition, they use country-specific geopolitical risk (GPR) indexes developed in Caldara and Iacoviello (2022). They estimate a bivariate panel VAR and find:
- Geopolitical risks increase inflation worldwide, with the inflationary effect of fiscal policy, higher commodity prices, and supply disruptions more than offsetting the deflationary effects of lower consumer sentiment and tighter financial conditions.
- Exchange rate depreciation is an important transmission channel to inflation and is consistent with the view that geopolitical events can lead to large flight-to-safety international capital flows.
Do Geopolitical Risks Raise or Lower Inflation?
Authors: Dario Caldara, Sarah Conlisk, Matteo Iacoviello, Maddie Penn
From: Federal Reserve Board
Geopolitical risks and the price of oil
Mignon and Saadaoui in this paper use the same geopolitical risk (GPR) index developed in Caldara and Iacoviello (2022) as the paper above in addition to the Political Relationship Index (PRI) (built by the Institute of International Relations at Tsinghua University to measure political relationships for China and its major trade partners) to assess the effect of US-China political relationships and geopolitical risks on oil prices. The authors in order decipher the differences between the impact of political tensions and geopolitical risks, two concepts that are related to each other but are not entirely substitutable, on oil prices, they use structural vector autoregressions and Local Projections (LP).
Our findings show that an improvement in the US-China political relationships positively affects the oil market: positive shocks on PRI are associated with optimistic expectations regarding future economic activity, driving up oil prices. Similarly, we find that higher geopolitical risks drive up oil prices, as positive shocks on GPR reflect fears of oil supply disruption, pulling up oil prices.
How Political Tensions and Geopolitical Risks Impact Oil Prices?
Authors: Valérie Mignon, Jamel Saadaoui
From: University of Paris Ouest, University of Strasbourg
