NBER paper says geopolitical risk impacts consumer expectations

New research helps to establish a causal link between geopolitical risk and households’ consumption decisions.

The authors – Yuriy Gorodnichenko, Dimitris Georgarakos, Geoff Kenny and Olivier Coibion – note that consumer confidence appears to have fallen around previous geopolitical shocks, such as Iraq’s invasion of Kuwait in 1990 and the result of the 2016 referendum that led to the UK’s departure from the European Union. However, they note that establishing a causal link is difficult.

They tackle the problem by using questions added in recent years to the European Central Bank’s consumer expectations survey. Respondents were asked how they would respond to specific durations of the Russia-Ukraine war. Different sets of respondents were randomly allocated different estimated durations for the conflict.

The results, published this week by the US National Bureau of Economic Research, show that a longer expected duration of the war leads respondents to predict that they will lower consumption over the coming year. Respondents expect the conflict to produce stagflation, a worsening in their household’s finances and a deterioration in government budgets.

“Together, this indicates that the risk of geopolitical conflict can already have negative economic consequences through expectations, even when the conflict does not yet have a very direct impact on economic actors,” the authors say.