Inflation Spillovers and Geopolitical Risks: Evidence from Euro Area Countries Using TVP-VAR and Quantile Models

This study examines the inflation transmission mechanism across 14 European Union countries, from May 1963 to November 2023. Contrary to the existing literature, this study employs a two-stage approach to examine the spillover effect of inflation in the European Region. The study identifies the inflation spillover effects by applying a time-varying parameter vector autoregressive (TVP-VAR) model with the joint connectedness framework. Moreover, we analyze the relationship between the Total Connectedness Index (TCI) and geopolitical risks (GPR) using the Quantile-on-Quantile (QoQ) model and explore how geopolitical uncertainties influence inflation transmission dynamics. The analysis provides significant contributions to the literature in terms of both methodology and scope by allowing responses to risk shocks of different magnitudes to be measured at quantile levels. The findings show that as Denmark, Germany, and France are highly interconnected with other countries in the region, they have an essential of spreading inflation. Unlike, the global and the US’s risk indices, Russia’s and Europe’s GPR have a more significant impact on inflation. Finally, the interaction between TCI and GPR differ across quantiles, implying the existence of non-linear and asymmetric impacts of geopolitical events on inflation interconnectedness.