Economic Knock-On Effects of Russia's Geopolitical Risk on Advanced Economies: A Global VAR Approach

Talk by Michael Funke (Hamburg University) as part of the Research Seminar Series of the IOS Economics Department.

Using a global VAR model as a methodological tool, we analyze how the skyrocketing Russian geopolitical risk shock after the invasion of Ukraine propagates across 26 advanced economies and quantify the economic effects of the war. The impulse response functions in response to the heightened Russian geopolitical risk shock reveal a contraction of GDP and an increase in inflation. The estimation results thus suggest that the Russian geopolitical risk shock resembles an adverse aggregate supply shock. Eastern European neighboring countries are particularly affected by the Russian geopolitical risk shock. We also document a strong component of the Russian geopolitical risk shock that is not driven by fossil fuel prices.