Board of Governors of the Federal Reserve System

Figure 1. The Geopolitical Risk Index

The Caldara-Iacoviello geopolitical risk (GPR) index from January 1970 through May 2022. The index is constructed using searches of newspaper articles that mention adverse geopolitical events and associated risks. The index is normalized to average 100 throughout the 1985-2019 period. Spikes are labeled with significant geopolitical events, Yom Kippur War, Soviet-Afghan War, Falklands War, Iraq invasion of Kuwait, Gulf War, Bosnian War, Sept. 11, Iraq War, Paris terrorist attacks, and Russian invasion of Ukraine. Data for May is preliminary. The index spiked in the aftermath of the Russian invasion of Ukraine: in March 2022, readings of the index reached one of the highest values in the past 50 years, comparable with similar peaks during the Gulf and Iraq Wars.

Figure 2. Recent Geopolitical Concerns

A. Geopolitical Risk and its Components (left panel)

The left panel plots recent movements in the Geopolitical Risk (GPR) index and its two sub-components, the geopolitical threats (GPT) and geopolitical acts (GPA) indexes. The index is normalized to average 100 throughout the 1985-2019 period. Data for May is preliminary. The GPT index captures concerns about scope, duration, and ramifications of geopolitical tensions and conflicts. The GPA index captures events such as the start and the actual unfolding of wars. The GPT index, which surged between January and March, declined in April and May, consistent with the view that extreme outcomes of the war, such as a direct involvement of more countries, are perhaps perceived as less likely. The GPA index also spiked in the aftermath of the invasion and is retracting, albeit more slowly.

B. Firm-Level Geopolitical Concerns (right panel)

The right panel plots the evolution in the share of globally listed firms’ earnings calls that mention concerns over the Russia Ukraine war between March 1, 2022, and May 13, 2022. Transcripts that fall under this category include some mention of war-related words (such as “war” or “invasion”) together with “Russia” or “Ukraine." Data for May is preliminary. The geopolitical risk measure based on earnings calls shares very similar dynamics to the newspaper-based indexes, lending support to the notion that the newspaper-based GPR indexes are capturing information that is relevant to firms and investors.

Figure 3. Effects of the Recent Increase in Geopolitical Risk

The figure plots the response over time of world GDP (left panel, percent) and world inflation (right panel, percentage points) to a rise in geopolitical risks sized to mimic the increase occurred between January and April 2022, estimated using a structural vector autoregression (VAR) model. The model includes monthly measures of world GDP, world inflation, global stock prices, real oil prices, the broad real dollar, commodity prices, global consumer confidence, and the Geopolitical Threats (GPT) and Geopolitical Act indexes. Data in the model is from January 1974 to April 2022 and uses three lags. The solid red lines in the figure plot the central estimates. The dashed blue lines denote the 70 percent confidence intervals. The variables are plotted from January 2022 to December 2023 in deviation from a no-war baseline. The rise in geopolitical risks produces a drag on world GDP that builds throughout 2022, cumulating to a negative impact of around 1.7 percent. Similarly, the rise in geopolitical risks boosts prices, causing an increase in global inflation of 1.3 percentage points by the second half of 2022, after which the effects begin to subside.

Figure 4. Transmission Mechanisms of Higher Geopolitical Risk on Macroeconomic Variables

The figure plots the maximum impact in the first year of a rise in geopolitical risks sized to mimic the increase occurred between January and April 2022, estimated using a structural vector autoregression (VAR) model. The model includes monthly measures of world GDP, world inflation, global stock prices, real oil prices, the broad real dollar, commodity prices, global consumer confidence, and the Geopolitical Threats (GPT) and Geopolitical Act indexes. Data in the model is from January 1974 to April 2022 and uses three lags. For each variable, the red dots plot the central estimates of the maximum impact in the first year. The blue error bars denote 70 percent confidence intervals. The effect is measured in percent deviation from a no-war baseline for all variables except inflation, for which it is measured in percentage points. The effects of elevated geopolitical risks in 2022 are associated with declining consumer confidence and stock prices, factors weakening aggregate demand. The dollar appreciates, in line with the evidence that spikes in global uncertainty and adverse risk sentiment can trigger flight-to-safety international capital flows (Forbes and Warnock, 2012). Commodity prices and oil prices increase, putting downward pressure on activity and upward pressure on inflation.

Figure 5. Firm-Level Geopolitical Concerns by Country in 2022

This chart depicts the exposure of a country to the Russia-Ukraine war, calculated using the share of firms’ earnings calls mentioning the Russia–Ukraine war, based on the country where the firm is headquartered. Warmer colors denote higher exposure to the conflict. Earnings calls’ share is calculated for countries with at least 10 earnings calls between March 1, 2022, and May 13, 2022. Countries with no earnings calls or with less than 10 earnings calls are shown in gray. White indicates that no firm mentions concerns related to the conflict, while deep red indicates 100 percent of firms mentioning concerns related to the conflict. Figure 5 visualizes country exposure in a map of the world, with warmer colors denoting higher exposure. Countries in Europe, and especially those that are in proximity to the conflict, are the most exposed. Roughly 80 percent of firms in Finland and Poland, countries sharing a border with Russia or Ukraine, are concerned about the war. For Germany, a country with high exposure to the conflict through the import of energy from Russia, the fraction of firms mentioning the conflict is 75 percent. The rest of the world does not appear to be exposed as intensely.

Figure 6. Firm-Level Geopolitical Concerns by Industry in 2022

This chart illustrates the share of firms’ earnings calls mentioning the Russia–Ukraine war between March 1, 2022, and May 13, 2022, based on firms’ industry of operation and geographic location. Industry classifications are based on the Global Industry Classification Standard (GICS) and are aggregated into four categories: Automobile, Capital and Consumer Goods, Energy and Food, and Services. Russian and Ukrainian firms are excluded from the Europe region. Aggregation from the GICS is as follows: Automobile includes Automobile & Components. Capital & consumer goods includes Capital Goods, Consumer Durables & Apparel, Semiconductors & Semiconductor Equipment, Software & Services, and Technology Hardware & Equipment. Energy & Food includes Energy, Food & Staples Retailing, Food, Beverage & Tobacco, Household & Personal Products, and Materials. Services includes Banks, Commercial & Professional Services, Diversified Financials, Health Care Equipment & Services, Insurance, Media & Entertainment, Pharmaceuticals, Biotechnology & Life Sciences, Retailing, and Telecommunication Services. The effect of the current conflict appears more concentrated in goods-producing industries that reportedly had been experiencing bottlenecks even before the Russian invasion, with an incidence of around 80 percent among European automobile companies. Meanwhile, industries that are less affected by supply disruptions—such as services—are less likely to express concerns over the war.