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Measuring Geopolitical Risk

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  • Dario Caldara
  • Matteo Iacoviello

Abstract

We present a news-based measure of adverse geopolitical events and associated risks. The geopolitical risk (GPR) index spikes around the two world wars, at the beginning of the Korean War, during the Cuban Missile Crisis, and after 9/11. Higher geopolitical risk foreshadows lower investment and employment and is associated with higher disaster probability and larger downside risks. The adverse consequences of the GPR index are driven by both the threat and the realization of adverse geopolitical events. We complement our aggregate measures with industry- and firm-level indicators of geopolitical risk. Investment drops more in industries that are exposed to aggregate geopolitical risk. Higher firm-level geopolitical risk is associated with lower firm-level investment.

Suggested Citation

  • Dario Caldara & Matteo Iacoviello, 2022. "Measuring Geopolitical Risk," American Economic Review, American Economic Association, vol. 112(4), pages 1194-1225, April.
    • Handle: RePEc:aea:aecrev:v:112:y:2022:i:4:p:1194-1225
    DOI: 10.1257/aer.20191823
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    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • N40 - Economic History - - Government, War, Law, International Relations, and Regulation - - - General, International, or Comparative

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