Julian Reynolds

Policymakers and market participants consistently cite geopolitical developments as a key risk to the global economy and financial system. But how can one quantify the potential macroeconomic effects of these developments? Applying local projections to a popular metric of geopolitical risk, I show that geopolitical risk weighs on GDP in the central case and increases the severity of adverse outcomes. This impact appears much larger in emerging market economies (EMEs) than advanced economies (AEs). Geopolitical risk also pushes up inflation in both central case and adverse outcomes, implying that macroeconomic policymakers have to trade-off stabilising output versus inflation. Finally, I show that geopolitical risk may transmit to output and inflation via trade and uncertainty channels.