Geopolitical Risk Shocks: When Size Matters

• Authors: Davide Brignone, Luca Gambetti and Martino Ricci
• European Economic Review, Vol. 188, Article 105392, August 2026

We investigate the economic effects of geopolitical risk (GPR) shocks on the US economy, with a focus on non-linear transmission mechanisms. Using a VARX framework, we show that larger positive shocks have a disproportionately greater impact, pointing to the existence of an amplification channel driven by rising uncertainty that leads to sharp declines in private demand and equity prices. In contrast, the prices’ responses are relatively muted, reflecting the offsetting effects of reduced demand and increasing supply-side pressures. Decomposing GPR into Threats and Acts shocks helps explain this result: Threats shocks behave as second-moment uncertainty disturbances that significantly raise oil prices and inflation expectations, exerting upward pressure on domestic prices, while Acts shocks transmit more similarly to first-moment negative demand shocks.