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American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Measuring Geopolitical Risk

  • Dario Caldara
  • Matteo Iacoviello
American Economic Review
vol. 112, no. 4, April 2022
(pp. 1194–1225)
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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.

Citation

Caldara, Dario, and Matteo Iacoviello. 2022. "Measuring Geopolitical Risk." American Economic Review, 112 (4): 1194–1225. DOI: 10.1257/aer.20191823

Additional Materials

JEL Classification

  • C43 Index Numbers and Aggregation; leading indicators
  • E32 Business Fluctuations; Cycles
  • F51 International Conflicts; Negotiations; Sanctions
  • F52 National Security; Economic Nationalism
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • H56 National Security and War
  • N40 Economic History: Government, War, Law, International Relations, and Regulation: General, International, or Comparative