A1540
Title: Commodity price shocks, geopolitical risk, and macroeconomic activity
Authors: Leonardo Quero Virla - Otto-Friedrich-Universitaet Bamberg (Germany) [presenting]
Christian Proano - Otto-Friedrich-Universitaet Bamberg (Germany)
Abstract: The interaction between fluctuations in commodity prices and macroeconomic activity has been a recurrent topic in empirical macroeconomics for at least four decades. Such interaction is often linked to geopolitical events, which result in large price and quantity movements in international commodity markets. The aim is to contribute to the literature by exploring the joint dynamics of commodity prices, geopolitical risk and economic activity at the global and Euro Area levels. In the frequency domain, through the Breitung-Candelon test, limited causality is found between commodity prices and global economic activity (in both directions) at certain frequencies, but the geopolitical risk was not relevant in any case. In the time domain, the recursive SVAR and local projections results show that while geopolitical risk produces a general decrease in economic activity, commodity price shocks are contractionary for developed economies and expansionary for emerging ones. However, regime-based local projections show that the level of geopolitical risk influences the size and sign of responses to geopolitical risk shocks. Additionally, a Bayesian SVAR analysis with sign and zero restrictions and hierarchical prior selection suggests that both geopolitical risk and commodity prices have an important role in explaining fluctuations in the level of output and economic expectations in the Euro Area.
