Euro area geopolitical risk index reveals inflation, output costs
A new Bank for International Settlements (BIS) working paper introduces a geopolitical risk indicator tailored to the euro area. It finds that shocks to this index have significant recessionary and inflationary consequences, effects missed by US-based measures.
Tailored index reveals hidden impacts
The paper introduces the euro area geopolitical risk (EA GPR) index, constructed from European news sources to reflect local perspectives.
This index diverges significantly from Anglosphere measures, particularly during the war in Ukraine, highlighting the importance of a euro area-specific view.
Shocks to the EA GPR index are found to lower economic activity, raise prices, and lead to monetary policy tightening in the euro area.
The authors estimate that the war in Ukraine imposed substantial output losses and inflationary pressures on the euro area in 2022.
They also assess future euro area prospects, showing high sensitivity to alternative paths of geopolitical risk amid ongoing conflicts.
Shortages drive risk transmission
The study explores the transmission channels of geopolitical risk, complementing its analysis with two news-based measures: sanctions intensity and shortages for the euro area.
Through counterfactual exercises, the authors find that the sanctions channel plays only a limited role in the euro area's macroeconomic response.
In contrast, shortages emerge as a significant transmission mechanism, accounting for a substantial share of the observed inflationary effects.
This comprehensive toolkit allows for a more nuanced understanding of how geopolitical risk propagates through the euro area economy.
Local lens, global relevance
This paper delivers a crucial, long-overdue tool for understanding geopolitical risk from a euro area perspective.
By demonstrating the limitations of US-centric measures, it provides policymakers with a more accurate lens for assessing regional vulnerabilities and economic impacts.
The findings on shortages as a key transmission channel offer actionable insights for building resilience against future shocks.