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Geopolitical risk perceptions

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How can geopolitical risk be measured effectively given its lack of a universal standard? Yevheniia Bondarenko, Vivien Lewis and Yves Schüler discuss a new approach to developing geopolitical risk indicators using local newspaper coverage to capture diverse perceptions.

Image courtesy of interviewee. November 19, 2024

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This video discusses the negative economic impacts of geopolitical tensions, including disruptions to trade, misallocation of resources, and increased uncertainty that impedes investment and growth. It defines geopolitical risk as the realization and escalation of adverse events like wars and terrorism, with perceptions of this risk varying based on individual and local contexts.

The authors highlight that geopolitical risk is measured differently across countries, using methods such as analyzing newspaper coverage of conflicts. They found that local perceptions, particularly in Russia, are significantly influenced by local media, which prioritize regional conflicts over global issues that may be covered more broadly in Western media. This video affects investment and economic responses differently.

The study demonstrates that geopolitical risk shocks have a more profound economic impact when measured using localized indicators than broader global indices. It also finds that sanctions amplify the economic effects of geopolitical risks, especially concerning inflation and interest rates in affected countries. Ultimately, the study emphasizes the importance of understanding how perceptions of geopolitical risk vary and influence economic behavior, advocating for more nuanced measures that account for different types of geopolitical risks.

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Here are five key points from the video discussing the impact of geopolitical tensions on the economy:

1. **Economic Disruption and Resource Misallocation**: Geopolitical tensions disrupt trade, lead to the diversion of labor and capital toward war efforts, and create economic uncertainty which hampers investment and growth, contributing to overall economic instability.

2. **Perception of Geopolitical Risk**: Geopolitical risk varies based on location and individual perspectives. Events closer to a major trading partner are perceived as more significant than distant conflicts. This perception influences economic behavior, such as investment and consumption decisions.

3. **Media Influence on Risk Assessment**: Different media sources and their local convideos significantly shape geopolitical risk perception. For instance, Russian media may emphasize local conflicts more than Western media, affecting the perception and economic impact of geopolitical events in each country.

4. **Impact of Geopolitical Risk Shocks**: A sudden increase in geopolitical risk as measured by localized indicators has profound negative effects on the Russian economy, including declines in output and increases in prices, while similar shocks measured by broader Anglosphere indicators show muted effects.

5. **Role of Sanctions in Economic Impact**: Sanctions amplify the economic effects of geopolitical risk shocks, particularly regarding inflation and central bank responses. The study suggests that understanding specific geopolitical risks, including sanctions, provides deeper insights into their economic implications and helps in formulating policy responses.

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Here are some key quotes extracted from the video:

1. **Impact on Economic Behavior**: “Geopolitical tensions are bad for the economy in several different ways. They disrupt trade… and there’s also economic uncertainty, which hampers investment and growth.”

2. **Definition of Geopolitical Risk**: “So we define geopolitical risk as the threat realization and escalation of adverse events associated with wars, terrorism, and any tensions among states and political actors that affect the peaceful course.”

3. **Perception of Geopolitical Risk**: “The perception of geopolitical risk depends on where you are and who you are… it is this perception of geopolitical risk that drives economic behavior.”

4. **Measuring Geopolitical Risk**: “We use a video-based method… we computed a geopolitical risk measure for Germany… and we found that it attached more importance to the Russian attack on Ukraine than it did to 9/11.”

5. **Local vs. Global Perspectives**: “Local geopolitical risk shocks have a much stronger negative impact on Russia's economy compared to the Anglosphere GPR index.”

6. **Influence of Media**: “The level of press freedom and government influence on the media contribute to how geopolitical risk is perceived and transmitted to the economy.”

7. **Effects of Geopolitical Risk Shock**: “A shock… in this GPR indicator has strong adverse effects on the Russian economy, resembling a negative supply shock.”

8. **Role of Sanctions**: “We observe that sanctions intensity rises by about 10%… this highlights this important interplay between geopolitical risk and sanctions.”

9. **Amplification of Effects**: “The sanctions channel plays a key role in amplifying the inflationary effects of geopolitical risk shocks.”

10. **Conclusion and Future Research**: “We find that these perceptions vary depending on the country of origin of the media sources… and we thought about specific geopolitical risk types such as cyber warfare and energy conflicts.”

These quotes encapsulate the main themes and findings discussed in the video, focusing on the definitions and consequences of geopolitical risk and the role of media and sanctions in shaping economic outcomes.

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

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Geopolitical tensions are bad

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for the economy in several different ways.

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They disrupt trade, they lead to misallocation of resources

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in that, labor

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and capital, used for the war effort

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and are not, used in the most productive, way.

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And there's also economic uncertainty,

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which hampers investment and growth.

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Also, geopolitical tensions can lead to surges in energy

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and commodity prices and in general to financial volatility.

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So to understand the economic consequences

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of adverse geopolitical events, we need

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to measure geopolitical risk.

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So let me first define what we mean by geopolitical risk.

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So we define geopolitical risk,

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and I'm reading this out now.

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So as the threat realization

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and escalation of adverse events associated with wars,

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terrorism, and any tensions among states

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and political actors that affect the peaceful course

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of international relations, this is a, a definition

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that comes from an article by Carl Zara

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and Yako published in the American Economic Review in,

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2022.

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So the, the main message of our paper geopolitical risk

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perceptions is that measures

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of geopolitical risk are not universal.

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It's, the, the perception of geopolitical risk

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depends on, on where you are and who you are.

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So when there's a conflict in a neighboring country

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or in a major trading partner, this is going

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to affect you much more than, you know, a conflict that is,

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in, in a place that is far away.

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And it is this perception of geopolitical risk that drives

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economic behavior.

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So things like investment or consumption decisions.

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Uh, so how, how do measures

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of geopolitical risks, differ?

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So, first, how, how do we measure,

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geopolitical risks?

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Well, we, use a text-based, method.

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And in particular, we look at the share

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of newspaper articles, in a particular period

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that are about wars or conflicts.

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Uh, and reporters in different countries

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and writing in that in the local language are going to cover

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or write about the same geopolitical events

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differently depending on

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how important these events are for their country.

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So, for instance, what we found, so we, we,

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computed a geo geopolitical risk measure, for Germany,

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based on German media.

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And we found that it attached more importance

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to the Russian attack on Ukraine than it did

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to, nine 11.

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And when we looked at a geopolitical risk indicator

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based on English language newspapers, we found the opposite.

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Um, the Russian case study, that we used focuses on

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how local geopolitical risk strokes

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affects the Russian economy.

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And, for these purposes we used data from Russian

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language news sources, and we found

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that local GPR shocks have a much stronger negative impact

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on Russia's economy compared to the Sphe GPR index, which,

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is based on English language newspapers from,

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United States, United Kingdom, and Canada.

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And, the svi GPR index tracks,

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more global events like the Iraq War,

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but doesn't, fully capture local Russian perspectives,

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especially around, such regional conflicts like,

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RUSA Georgian war or the Rusa Ukrainian conflict.

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And the main, limitation of ROS VGPR is that,

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it misses this localized dynamics,

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making it less effective in understanding Russia's economic

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responses to geopolitical risk.

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And we, construct our GPR measure using procedure of Cal

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and Vela, which used textual analysis to construct

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and use based GPR indicator.

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And, to build our local indices,

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we translated search queries into local languages,

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and then we used, local media sources.

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And for Russia, for example, we used Russian language media,

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but distinguishing between state controlled

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and independent newspapers.

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And this helped us, to evaluate

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how press freedom affected this risk perception.

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And for comparison, we also developed, similar monthly

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GPR indicators for Ukraine and for Germany.

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And these, country specifics industries helps us

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to understand how local factors for the, like,

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media freedom and,

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direct involvement in conflicts could significantly

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influence the interpretation of geopolitical events

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and, the impact on each country's economy.

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And from our point of view, language

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and media sources play a significant role in

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how geopolitical risk is measured, is perceived.

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And in Russia, state controlled media often implies

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to political risks showing high em reaction

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to events like, annexation of Crimea

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and, the invasion of Ukraine.

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And in contrast,

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the anglosphere GPR underestimate these spikes.

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And, these difference is mainly

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because Russian media focuses more on the local conflicts,

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like, while, western media sources, they

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cover small global events

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and pay less attention to specific regional tensions.

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And these observations highlight how different media

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landscapes and, political environment,

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shape risk perception

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and these other findings, can be explained

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by different political

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and media environments in each country.

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And in Russia, state control media often emphasize

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or, even distort geopolitical events

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to feed government narratives,

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which increases local perception of risk.

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On the other hand,

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Western media focuses on broader global issues, which leads

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to a less intensive representation

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of local conflicts.

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And essentially, the level of press freedom,

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government influence of the media

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and the proximity to the geopolitical events.

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All these factors contribute to

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how geopolitical risk is perceived

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and transmitted to the economy.

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As you can see, we've basically pointed out differences

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and descriptives basically

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that we see different events being emphasized and so on.

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But now we wanted to take the analysis to another level,

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and basically we take all these different GPR indicators

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that we have constructed from different languages

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and put this into a statistical model like a Beijing VR

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together with some Russian time series that are supposed

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to measure the Russian ery economy

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and its financial markets.

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And, then the exercise we conduct is,

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to identify an unexpected sudden rise in geopolitical risk.

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So yeah, some, some, some exogenous event

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that raises geopolitical risk

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and want to understand

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how this affects then the Russian economy.

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And then the first step, we basically use our,

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Russian GPR indicator.

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There was stories from Russian local news

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and we find that a shock.

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So an sudden unexpected movement in this GPR indicator has

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strong adverse effects on the Russian economy, which,

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basically resembles a negative supply shock.

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So we observe a significant persistent drop in output,

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a rise in prices, and

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therefore the central banks increases its interest rates.

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Also, financial markets are strongly affected.

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We see a decline in equity in house prices

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and a strong uptick in financial volatility.

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And now the interesting part is if we replace this Russian

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GPR indicator with this broad anglosphere GPR indicator

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that was measured from anglosphere news sources, we see

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that a fa a shock to that variable does no,

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does not have an impact on output prices

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or interest rates whatsoever.

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Still, we observe some more muted movements on financial

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markets, but altogether this emphasizes our story

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that geopolitical risk perceptions matter

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because we do not observe

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the strong effects on the Russian economy.

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If we look at a anglosphere GPR shock, in contrast

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to Russian GPR shock.

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And so then in the next step,

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because yeah, we are dealing with the Russian case study,

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we thought about sanctions because sanctions

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and geopolitical risk basically go together.

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And, so we wanted to assess the role of sanctions

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for the transmission of these GPR shocks.

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Um, so the geo risk shocks,

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which is very relevant for policy.

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And, so we develop another sanctions intensity measure

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in our study, also relying on newspapers.

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And then we add this, sanctions index also

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to our statistical analysis

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and again, conduct the same exercise.

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So we identify an unexpected rise in geo in Russian

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geopolitical risk,

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and we observe that sanctions intensity rises by about 10%,

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which then in turn prolongs geopolitical risk in Russia.

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So this highlights this important interplay

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between geopolitical risk and sanctions.

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Then we were interested, to understand the importance

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of the sanctions channel for the transmission

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of geopolitical risk, which means that now we wanted

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to understand what happens if there is a sudden rise in

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geopolitical risk, but sanctions intensity

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does not change at all.

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So conducting this exercise, we found

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that geopolitical risk still has very strong adverse effects

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on the Russian economy, even in the absence

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of this sanction channel.

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Um, for output, for instance, we find a bit more muted,

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but still very persistent impact.

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Um, but which is very important, very interesting, is that,

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the central bank, barely moves its interest rate

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if the sanctions channel is non-active.

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So this is

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because inflation, the reaction

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of inflation is much smaller.

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So interpreting this finding means

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that the sanctions channel plays a key role in amplifying

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the inflationary effects of geopolitical, risk shocks.

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So having outlined these major results, we overall conclude

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that, yeah, geopolitical risk perceptions matter.

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We find that these perceptions vary depending on the country

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of origin, of the media sources.

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And this means then

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that geopolitical risk is not universally captured

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by global indices like those based on anglosphere media.

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Also, we find that sanctions act as an amplifier

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for the economic impact

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of geopolitical risk shocks in the sanctions target country.

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And they're particularly on inflation and

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therefore on interest rates.

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And, taking this study, to to

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to the next level, we, thought about,

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disaggregating the geopolitical risk indicators into

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specific geopolitical risk types such as cyber warfare,

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energy conflicts, regional tensions,

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which also could be very relevant from a policy standpoint

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because it would allow us

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to basically have a deeper understanding

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how different risks propagate

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and impact economies, central banks

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and fiscal authorities.

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Everyone is trying to understand, the threats

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that originate from geopolitical risk on the economies.

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And we basically show in our study

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that it's really important to take the angle, the perception

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of these geopolitical risk into account in order to really,

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be able to assess the, yeah, the risks

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that are stemming from geopolitical movements,

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interplays and so on.

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So I think this is the major, the major, punchline of,

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of, of the study we're conducting.

Impact of Geopolitical Tensions on Economic Stability

00:00:00 - Geopolitical tensions are bad for the economy in several different ways. They disrupt trade, they lead to misallocation of resources in that, labor and capital, used for the war effort and are not, used in the most productive, way. And there's also economic uncertainty, which hampers investment and growth. Also, geopolitical tensions can lead to surges in energy and commodity prices and in general to financial volatility.

00:00:37 - of adverse geopolitical events, we need to measure geopolitical risk. So let me first define what we mean by geopolitical risk. So we define geopolitical risk, and I'm reading this out now. So as the threat realization and escalation of adverse events associated with wars, terrorism, and any tensions among states and political actors that affect the peaceful course

00:01:09 - that comes from an article by Carl Zara and Yako published in the American Economic Review in, 2022. So the, the main message of our paper geopolitical risk perceptions is that measures of geopolitical risk are not universal. It's, the, the perception of geopolitical risk depends on, on where you are and who you are.

Perception of Geopolitical Risk and Its Economic Impact

00:01:39 - or in a major trading partner, this is going to affect you much more than, you know, a conflict that is, in, in a place that is far away. And it is this perception of geopolitical risk that drives economic behavior. So things like investment or consumption decisions. so how, how do measures of geopolitical risks, differ?

00:02:10 - geopolitical risks? Well, we, use a text-based, method. And in particular, we look at the share of newspaper articles, in a particular period that are about wars or conflicts. and reporters in different countries and writing in that in the local language are going to cover or write about the same geopolitical events differently depending on

00:02:43 - So, for instance, what we found, so we, we, computed a geo geopolitical risk measure, for Germany, based on German media. And we found that it attached more importance to the Russian attack on Ukraine than it did to, nine 11. And when we looked at a geopolitical risk indicator based on English language newspapers, we found the opposite.

Impact of Local Geopolitical Risk on the Russian Economy

00:03:13 - how local geopolitical risk strokes affects the Russian economy. And, for these purposes we used data from Russian language news sources, and we found that local GPR shocks have a much stronger negative impact on Russia's economy compared to the Sphe GPR index, which, is based on English language newspapers from, United States, United Kingdom, and Canada.

00:03:44 - more global events like the Iraq War, but doesn't, fully capture local Russian perspectives, especially around, such regional conflicts like, RUSA Georgian war or the Rusa Ukrainian conflict. And the main, limitation of ROS VGPR is that, it misses this localized dynamics,

00:04:15 - responses to geopolitical risk. And we, construct our GPR measure using procedure of Cal and Vela, which used textual analysis to construct and use based GPR indicator. And, to build our local indices, we translated search queries into local languages, and then we used, local media sources.

Influence of Media Freedom on Geopolitical Risk Perception

00:04:46 - but distinguishing between state controlled and independent newspapers. And this helped us, to evaluate how press freedom affected this risk perception. And for comparison, we also developed, similar monthly GPR indicators for Ukraine and for Germany. And these, country specifics industries helps us

00:05:18 - media freedom and, direct involvement in conflicts could significantly influence the interpretation of geopolitical events and, the impact on each country's economy. And from our point of view, language and media sources play a significant role in how geopolitical risk is measured, is perceived. And in Russia, state controlled media often implies

00:05:53 - to events like, annexation of Crimea and, the invasion of Ukraine. And in contrast, the anglosphere GPR underestimate these spikes. And, these difference is mainly because Russian media focuses more on the local conflicts, like, while, western media sources, they

Media Influence on Geopolitical Risk Perception

00:06:21 - and pay less attention to specific regional tensions. And these observations highlight how different media landscapes and, political environment, shape risk perception and these other findings, can be explained by different political and media environments in each country. And in Russia, state control media often emphasize

00:06:55 - to feed government narratives, which increases local perception of risk. On the other hand, Western media focuses on broader global issues, which leads to a less intensive representation of local conflicts. And essentially, the level of press freedom, government influence of the media

00:07:24 - All these factors contribute to how geopolitical risk is perceived and transmitted to the economy. As you can see, we've basically pointed out differences and descriptives basically that we see different events being emphasized and so on. But now we wanted to take the analysis to another level, and basically we take all these different GPR indicators that we have constructed from different languages and put this into a statistical model like a Beijing VR

Impacts of Geopolitical Risk on the Russian Economy

00:07:58 - to measure the Russian ery economy and its financial markets. And, then the exercise we conduct is, to identify an unexpected sudden rise in geopolitical risk. So yeah, some, some, some exogenous event that raises geopolitical risk and want to understand how this affects then the Russian economy. And then the first step, we basically use our, Russian GPR indicator.

00:08:28 - and we find that a shock. So an sudden unexpected movement in this GPR indicator has strong adverse effects on the Russian economy, which, basically resembles a negative supply shock. So we observe a significant persistent drop in output, a rise in prices, and therefore the central banks increases its interest rates. Also, financial markets are strongly affected. We see a decline in equity in house prices and a strong uptick in financial volatility.

00:09:03 - GPR indicator with this broad anglosphere GPR indicator that was measured from anglosphere news sources, we see that a fa a shock to that variable does no, does not have an impact on output prices or interest rates whatsoever. Still, we observe some more muted movements on financial markets, but altogether this emphasizes our story that geopolitical risk perceptions matter

Impact of Sanctions on Geopolitical Risk in Russia

00:09:32 - the strong effects on the Russian economy. If we look at a anglosphere GPR shock, in contrast to Russian GPR shock. And so then in the next step, because yeah, we are dealing with the Russian case study, we thought about sanctions because sanctions and geopolitical risk basically go together. And, so we wanted to assess the role of sanctions for the transmission of these GPR shocks.

00:10:02 - which is very relevant for policy. And, so we develop another sanctions intensity measure in our study, also relying on newspapers. And then we add this, sanctions index also to our statistical analysis and again, conduct the same exercise. So we identify an unexpected rise in geo in Russian geopolitical risk, and we observe that sanctions intensity rises by about 10%,

00:10:37 - So this highlights this important interplay between geopolitical risk and sanctions. Then we were interested, to understand the importance of the sanctions channel for the transmission of geopolitical risk, which means that now we wanted to understand what happens if there is a sudden rise in geopolitical risk, but sanctions intensity does not change at all. So conducting this exercise, we found

The Amplifying Effects of Sanctions on Geopolitical Risk and Inflation in Russia

00:11:09 - on the Russian economy, even in the absence of this sanction channel. for output, for instance, we find a bit more muted, but still very persistent impact. but which is very important, very interesting, is that, the central bank, barely moves its interest rate if the sanctions channel is non-active. So this is

00:11:36 - of inflation is much smaller. So interpreting this finding means that the sanctions channel plays a key role in amplifying the inflationary effects of geopolitical, risk shocks. So having outlined these major results, we overall conclude that, yeah, geopolitical risk perceptions matter. We find that these perceptions vary depending on the country of origin, of the media sources. And this means then

00:12:09 - by global indices like those based on anglosphere media. Also, we find that sanctions act as an amplifier for the economic impact of geopolitical risk shocks in the sanctions target country. And they're particularly on inflation and therefore on interest rates. And, taking this study, to to to the next level, we, thought about,

Understanding Geopolitical Risk: Impacts and Perceptions

00:12:39 - specific geopolitical risk types such as cyber warfare, energy conflicts, regional tensions, which also could be very relevant from a policy standpoint because it would allow us to basically have a deeper understanding how different risks propagate and impact economies, central banks and fiscal authorities. Everyone is trying to understand, the threats that originate from geopolitical risk on the economies.

00:13:28 - that it's really important to take the angle, the perception of these geopolitical risk into account in order to really, be able to assess the, yeah, the risks that are stemming from geopolitical movements, interplays and so on. So I think this is the major, the major, punchline of, of, of the study we're conducting.

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