The Bank of England published a staff working paper examining the economic effects of geopolitical risk shocks, with an emphasis on non-linear transmission. Using a VARX framework, the authors conclude that larger positive shocks have a disproportionate impact, consistent with an amplification channel driven by rising uncertainty. The analysis links large geopolitical risk shocks to precautionary behaviour that drives sharp falls in consumption and equity prices. Prices respond positively overall but the effects are muted, reflecting offsetting forces from weaker demand and heightened uncertainty. The paper also finds that shocks tied to anticipated geopolitical threats show pronounced non-linearities, materially increasing oil prices and inflation expectations and putting upward pressure on domestic prices. The working paper is published to elicit comments and does not represent Bank of England policy.
Bank of England 2025-02-21
Bank of England staff paper finds large geopolitical risk shocks amplify uncertainty and disproportionately hit consumption and equities
The Bank of England's staff paper analyzes the economic effects of geopolitical risk shocks, highlighting non-linear transmission and amplification through rising uncertainty. Large shocks significantly reduce consumption and equity prices, with muted overall price responses due to weaker demand and uncertainty. Anticipated geopolitical threats notably increase oil prices and inflation expectations, exerting upward pressure on domestic prices.