Juho Pitkäranta (Bank of Finland) - Identifying Geopolitical Transmission Channels from Oil Futures and Russian Media Narratives: Application to Finnish and German Economies

BOFIT-seminaarit

BOFIT Seminar - Juho Pitkäranta (Bank of Finland) - Identifying Geopolitical Transmission Channels from Oil Futures and Russian Media Narratives: Application to Finnish and German Economies

Abstract
Transmission of geopolitical tensions through an uncertainty channel and an energy channel are considered. Using Brent oil futures and Russian media narratives I identify two shocks for both channels: one related to adverse tensions between Russia and its neighbours, and one related to other geopolitical developments. Effects of these different types of geopolitical shocks are estimated on Finland, a small open economy and Germany, a large economic powerhouse with largely similar effects found. The energy channel has mildly inflationary effects while the uncertainty channel has strongly deflationary effects. Historical events are shown to be different mixes of these different transmission channels with some events being priced into expectations beforehand while others are not. It is concluded that as geopolitical risk indicators are driven by several economically distinct shocks, their dynamics are generally misspecified when single shock identification schemes such as Cholesky decompositions are used.

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