Geopolitical risks and their impact on global macro-financial stability : Literature and measurements
Hodula, Martin; Janků, Jan; Malovaná, Simona; Ngo, Ngoc Anh (25.09.2024)
Numero
9/2024Julkaisija
Bank of Finland
2024
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2024092574809Tiivistelmä
In our paper, we provide a review of the literature to identify the main transmission channels through which geopolitical risks (GPR) influence macro-financial stability. We begin by analyzing the existing measures of geopolitical tensions and uncertainty, showing that GPR impacts economic and financial uncertainty episodically, with significant but transient spikes during major geopolitical events. The review then identifies the two principal channels through which GPR affects macro-financial stability: the financial channel, operating through increased uncertainty and heightened risk aversion, leading to shifts in investment portfolio allocations and cross-border capital flows; and the real economy channel, impacting global trade, supply chains, and commodity markets. Using data from the past two to three decades, we provide graphical analyses that confirm the findings in the literature, highlighting the episodic nature of the impact of GPR. These insights underscore the need for policymakers and financial institutions to adopt event-specific approaches to effectively mitigate the adverse effects of geopolitical risks on economic and financial systems.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
This paper reviews the impact of geopolitical risks (GPR) on global macro-financial stability. It highlights the challenges central banks and policymakers face in managing unpredictable GPR shocks. The authors examine how these risks influence financial markets and the real economy, focusing on uncertainty spikes during major geopolitical events such as wars, terrorist attacks, and political conflicts. The paper also explores the existing literature to identify the main transmission channels through which GPR affects economic growth, investment, and financial stability. These findings emphasize the importance of developing event-specific strategies for mitigating the adverse effects of GPR.
CONTRIBUTION
The paper contributes to the literature by providing a comprehensive review of geopolitical risks and their effects on macro-financial stability. It categorizes and analyzes the primary transmission channels – namely the financial and real economy channels – that link GPR to economic outcomes. The financial channel operates through increased uncertainty, leading to changes in investment flows, while the real economy channel impacts trade, supply chains, and commodity markets. By compiling insights from various studies, the paper proposes a conceptual framework for understanding how GPR shocks influence global economies and financial systems, especially during periods of heightened uncertainty.
FINDINGS
The review identifies two key channels through which geopolitical risks affect macro-financial stability. The financial channel primarily operates through heightened uncertainty, which drives risk aversion and significant shifts in investment portfolios and capital flows. The real economy channel affects trade, supply chains, and commodity markets, indirectly influencing economic performance. The analysis reveals that the impact of GPR is episodic, with significant but temporary spikes in uncertainty during major geopolitical events, such as wars and terrorist attacks. These findings suggest that policymakers should adopt event-specific approaches to manage the macro-financial consequences of geopolitical shocks effectively.
FOCUS
This paper reviews the impact of geopolitical risks (GPR) on global macro-financial stability. It highlights the challenges central banks and policymakers face in managing unpredictable GPR shocks. The authors examine how these risks influence financial markets and the real economy, focusing on uncertainty spikes during major geopolitical events such as wars, terrorist attacks, and political conflicts. The paper also explores the existing literature to identify the main transmission channels through which GPR affects economic growth, investment, and financial stability. These findings emphasize the importance of developing event-specific strategies for mitigating the adverse effects of GPR.
CONTRIBUTION
The paper contributes to the literature by providing a comprehensive review of geopolitical risks and their effects on macro-financial stability. It categorizes and analyzes the primary transmission channels – namely the financial and real economy channels – that link GPR to economic outcomes. The financial channel operates through increased uncertainty, leading to changes in investment flows, while the real economy channel impacts trade, supply chains, and commodity markets. By compiling insights from various studies, the paper proposes a conceptual framework for understanding how GPR shocks influence global economies and financial systems, especially during periods of heightened uncertainty.
FINDINGS
The review identifies two key channels through which geopolitical risks affect macro-financial stability. The financial channel primarily operates through heightened uncertainty, which drives risk aversion and significant shifts in investment portfolios and capital flows. The real economy channel affects trade, supply chains, and commodity markets, indirectly influencing economic performance. The analysis reveals that the impact of GPR is episodic, with significant but temporary spikes in uncertainty during major geopolitical events, such as wars and terrorist attacks. These findings suggest that policymakers should adopt event-specific approaches to manage the macro-financial consequences of geopolitical shocks effectively.