This paper examines the effects of sentiment shocks on economic conditions, with an emphasis on the roles of uncertainty and state dependence, using monthly U.S. data from 1997 to 2024. We first show that Economic Policy Uncertainty (EPU) Granger-causes consumer confidence. Building on this result, we construct a sentiment shock as the innovation in consumer confidence that is orthogonal to EPU and news, ensuring that it captures unexpected movements in sentiment. This orthogonalized shock is then used as an external instrument in a Vector Autoregressive (VAR) Local Projection (VAR-LP) framework. Linear VAR-LP estimates indicate that a sentiment shock leads to modest increases in output and capacity utilization, along with a temporary rise in inflation, while providing no robust evidence of a systematic monetary policy response. Extending the analysis to a state-dependent setting shows that the effects of sentiment shocks are stronger and more immediate during periods of elevated uncertainty, whereas responses in low-uncertainty states are muted and often statistically indistinguishable from zero. Overall, the results suggest that the influence of consumer sentiment on the business cycle is amplified during episodes of heightened uncertainty.

This study aims to examine market reactions in the banking sector by market and region during the Israel-Hamas conflict. Moreover, we also explore the influence of sovereign risk and corporate characteristics on market reactions during the conflict. We analyzed a sample of 1,115 companies operating in the banking sector, using cumulative abnormal returns as a measure of market reaction. The results indicate that the banking sector exhibits a significant negative market reaction to the Israel-Hamas conflict. This finding is more pronounced in developed and emerging markets. By region, this finding is more pronounced in the Americas, the Middle East, and Asia. Additionally, sovereign risk exerts a significant negative impact on market reactions during announcement periods. This study contributes to the geopolitical finance literature by providing firm-level evidence from the global banking sector and highlighting heterogeneous market responses across market classifications, regions, and sovereign risk conditions during geopolitical conflict.

Climate change is a global phenomenon that has a significant impact on commodity prices. This paper analyzes the impact of El Ni & ntilde;o-Southern Oscillation (ENSO) on global commodity prices, using a Global Factor Local Projections (GFALP) model. Firstly, we demonstrate that unanticipated ENSO movements contribute to commodity price volatility asymmetrically during El Ni & ntilde;o and La Ni & ntilde;a periods. Secondly, climate change might disrupt ENSO patterns. We compare the current situation with potential climate change outcomes to evaluate its impact on commodity price stability. We compute an index measuring commodity price exposure to these disruptions. We demonstrate that in most cases, these shifts exacerbate commodity price volatility. Finally, we explore several avenues to explain the observed heterogeneity in the exposure of commodity prices to the evolution of ENSO that could result from climate change, and we highlight the crucial role of international commodity markets in adapting to climate change.

The COVID-19 pandemic and its aftermath exposed the vulnerabilities of global supply chains, leading to widespread delays and shortages that highlighted the interconnectedness of economies. This paper examines the global impact of supply chain disruptions on economic conditions, drawing on literature related to economic uncertainty, global economic integration, and the global supply chain disruptions. Using a Bayesian vector autoregression (BVAR) model, we analyse the effect of supply chain shocks. The empirical findings reveal that these disruptions significantly influence global economic stability, particularly through their impact on aggregate inflation and the policy responses that accompany them.

This study examines the impact of global trade disruptions using a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, focusing on the Red Sea Crisis, which has disrupted key maritime ports including the Bab el-Mandeb Strait, the Suez Canal and the Cape of Good Hope, and the severe drought constraining traffic through the Panama Canal. By analyzing cargo ship transit data before, during, and after these events, the study quantifies the effects of both geopolitical and environmental disruptions on global trade dynamics. The findings reveal displacement and increased volatility in trade patterns, highlighting the far-reaching impacts of such crises on international commerce. These results emphasize the need for geopolitical stability and environmental resilience in key trade routes, a conclusion that is also relevant for policymakers.

This paper investigates the effects of annual temperature-related weather shocks on global harvest production–specifically rice, maize, soybeans, and wheat, which are pivotal for global sustenance. We employ a global VAR–local projections (VAR-LP) framework over the period 1961–2022, with temperature shocks constructed as innovations in annual surface temperature anomalies obtained via a Kalman filter. The empirical results indicate that a one standard deviation temperature shock leads to an immediate decline in harvest production of approximately 0.73

How do geopolitical risk shocks impact monetary policy? Based on a panel of 18 economies, we develop and estimate an augmented panel Taylor rule via constant and time-varying local projection regression models. First, the panel evidence suggests that the interest rate decreases in the short run and increases in the medium run in the event of a geopolitical risk shock. Second, the results are confirmed in the time-varying model, where the policy reaction is accommodating in the short run (1 to 2 months) to limit the negative effects on consumer sentiment. In the medium term (12 to 15 months), the central bank is more committed to combating inflation pressures.

This paper presents a state-dependent extension of the Phillips Curve using a local projections (LPs) panel model based on data from 14 countries between January 1999 and December 2023. State dependence arises from the asymmetric effects of the El Ni & ntilde;o-Southern Oscillation (ENSO), which alternates between El Ni & ntilde;o and La Ni & ntilde;a phases. The results reveal two dimensions of this asymmetry. First, the Phillips Curve is steeper during La Ni & ntilde;a episodes, with inflation responding more strongly to unemployment gaps. Second, we find evidence of dynamic propagation: La Ni & ntilde;a episodes produce stronger and more persistent inflationary effects than El Ni & ntilde;o. These findings underscore the importance of incorporating ENSO-related asymmetries into macroeconomic models.

This study investigates the impact of supply shocks on financial leverage (debt-equity ratio) in the U.S. economy from 1998:Q1 to 2024:Q2. The study employs a linear and non-linear Local Projections (LP) and Bayesian Vector Autoregression (BVAR) models to explore dynamic relationships. While the LP models reveal that a supply chain shock negatively affects leverage with statistically significant results, there is no evidence of state dependence. The BVAR model suggest that a supply chain shock is disruptive via reduction (an increase) in output (inflation), accompanied by lower leverage.

PurposeThis study aims to examine the market response to the US-Houthi conflict in the US stock market, focusing on sectoral differences, company size and growth rates.Design/methodology/approachUsing daily closing prices of 1,832 companies listed on major US stock indexes from December 1, 2022, to February 29, 2024, this study applies the event study methodology to assess market reactions. Multiple event windows, including 15-day pre- and post-event periods, are analyzed to capture comprehensive market responses. January 11, 2024, is designated as the event date, marking the declaration of war between the US and the Houthis, with a 250-trading-day estimation window used for benchmarking expected returns.FindingsThe findings indicate that the US-Houthi conflict significantly impacted the market, with defensive sectors such as healthcare and utilities responding positively, while sectors like energy and financials showed negative reactions. Smaller companies exhibited greater volatility, with a pattern of positive reactions before the event, negative responses during, and a recovery afterward. In contrast, large companies showed consistent positive reactions. Market reactions also varied by growth rates, with low- and medium-growth companies experiencing volatility and recovery, while high-growth companies, particularly in the energy sector, demonstrated resilience. These results highlight the differential impacts of geopolitical events based on sector, company size, and growth potential.Originality/valueThis study is the first to examine the impact of the US-Houthi conflict on the US stock market. It provides novel insights into how sectoral differences, company size and growth rates influence market reactions to geopolitical events.

This study examines market reactions to the US-Houthi conflict on January 11, 2024, across various markets, regions, and industries within the financial sector, emphasizing the role of military strength in shaping global financial responses. An event study methodology is applied to a sample of 3,239 financial sector companies, observing market reactions over multiple event windows: a 15-day pre-event phase and a 15-day post-event phase surrounding the conflict announcement. Cross-sectional analysis is conducted to assess how military strength impacts financial market reactions. The results indicate significant market vulnerability to the US-Houthi conflict, particularly during the period from the event day on January 11, 2024, to the post-event phase, with developed markets experiencing the greatest impact. While American markets showed mixed responses, European, Middle Eastern, and African markets faced notable negative effects due to disrupted trade routes; Asian markets also showed negative reactions, though to a lesser extent. The banking industry recorded the most adverse reaction within the financial sector, and military strength emerged as a critical factor influencing investor behavior in response to the conflict. These findings highlight the need for policymakers to enhance financial market stability by considering military strength and trade route security in risk mitigation strategies, particularly in times of geopolitical uncertainty, such as the period surrounding the US-Houthi conflict in early 2024.

This study analyzes the effects of local and global geopolitical risks (GPR) on real equity returns. Using a panel and country-specific local projections (LP) model, we analyze the impact of local and global GPR shocks, where the latter is further decomposed into aggregate risks, threats, and actions. Our findings reveal that both local and global GPR shocks negatively impact real equity returns at the onset, with global shocks generally exerting a stronger influence. While threats tend to have a more pronounced negative effect compared to actions, we observe heterogeneous responses on financial markets to different types of geopolitical risks, we find that actions have greater potency in economies exposed to higher levels of local GPR due to recurring conflicts and geopolitical tensions.

This study investigates how El Ni & ntilde;o-Southern Oscillation (ENSO) climate patterns affect global economic conditions. Prior research suggests that ENSO phases, particularly El Ni & ntilde;o, influence economic outcomes, but with limited consensus on their broader macroeconomic impacts. Using a novel monthly dataset from 20 economies, covering 80% of global output from 1999 to 2022, we employ a global augmented vector autoregression with local projections (GAVARLP) model. The empirical findings suggest that El Ni & ntilde;o boosts output with minimal inflationary effects, reducing global economic policy uncertainty, while La Ni & ntilde;a raises food inflation, which can amplify aggregate inflation as a "second-round"effect, amplifying uncertainty. These findings shed light on the transmission channels of climate shocks and highlight the significant role of ENSO in shaping global economic conditions, emphasizing why climate shocks should be a concern for policy markers.

This study investigates the elasticity of healthcare expenditures (HCE) with respect to income growth using a balanced panel of 177 economies from 2001 to 2020. Applying a panel local projections (LP) model, we examine both global and heterogeneous effects across income groups, as defined by the World Bank income classification. The model is further extended to estimate the relationship between income and HCE during changing economic conditions. Accordingly, we find that the elasticity weakens during non-expansionary periods, while high-income countries exhibit a minimal contemporaneous response. In contrast, low-income countries exhibit a heightened contemporaneous response to income fluctuations during non-expansionary phases, revealing a hidden vulnerability to economic growth.

Supply chain disruptions have emerged as a critical factor influencing global economic conditions. This research examines the implications of global supply chain disruptions via Bayesian Vector Autoregression (BVAR) model as it relates to equity returns. The analysis reveals that supply chain shocks can be destabilizing via lower output, higher inflation and lower equity returns. These novel findings offer valuable insights for policymakers and investors.

This study examines how the US and Chinese markets reacted to the Israel-Hamas conflict using an event study method. The analysis included 2087 firms from China and 1881 firms from the US. The results show differing responses in these markets before and after the conflict was announced. However, some sectors like consumer staples, financials, real estate, and energy had similar reactions, with the energy sector showing a notably strong positive response. These results offer important insights for policymakers, firms, and investors seeking to understand how geopolitical events impact market dynamics.

This study investigates the impact of the Grain Corridor Agreement (GCA), particularly in the aftermath of the Russia-Ukraine conflict, on the prices of major grains (wheat, maize, and barley), pivotal for global sustenance. By delineating three significant shocks: the initiation of the conflict, the enforcement of the GCA, and Russia's subsequent withdrawal from it, we employ an Integrated GARCH (IGARCH) model to investigate the impact of the Russia-Ukraine conflict on grain prices. Our empirical findings reveal that all grain prices surged at the onset of the conflict, with barley experiencing the most pronounced increase. Additionally, volatility escalated across all grain prices during the conflict's inception, albeit subsiding upon the implementation of the GCA. Price volatility spiked initially but decreased with the GCA's enforcement. The evidence suggests that the conflict is driving up world grain prices and causing global vulnerability, and that conciliatory policies such as the GCA offer a short-term solution. However, long-term strategies should focus on reducing external dependence by reviewing agricultural policies and promoting domestic production. Moreover, policymakers are advised to consider both domestic and global market vulnerabilities when designing sound policies.Highlights International grain prices (wheat, maize and barley) spiked during the onset of the ongoing Russia-Ukraine conflict.The conflict triggered an international response to resume safe maritime humanitarian transportation of agricultural grains via GCA.We develop an empirical framework to assess the impact of the Russia-Ukraine conflict on grain prices.Empirical findings indicate that Russia-Ukraine conflict increased all grain prices.

This research examines the global implications of agricultural production and price fluctuations via Global Bayesian Vector Autoregression (GBVAR) model. We develop a novel Paasche agriculture price index, based on the relative time-varying contribution of four dominant food commodities shifting contributions of major food commodities (rice, maize, soybeans, wheat), pivotal for global sustenance. The analysis reveals that while agricultural production shocks are important, they exert a comparatively lesser impact than agriculture price shocks. Higher agriculture inflation can be destabilizing via lower output and higher aggregate inflation.

A common thread in the literature shows that an oil price shock can have a major impact on global economic conditions. We examine the global dimensions of changes to the global oil price and world economic uncertainty using three model types: ordinary least square (OLS); general additive model (GAM); and non-linear vector autoregression (VAR) model with local projections (LP). Our study highlights a positive and statistically significant effect of oil prices on economic uncertainty during non-expansionary periods, yet the impact is negative on economic uncertainty during periods of economic growth. Using a VAR-LP we analyze the global dimensions of a world oil price shock on global economic conditions and investigate whether there is consistency in how an oil price shock influences economic growth, consumer prices and economic uncertainty based on the state of economic conditions. The empirical evidence shows that during an expansionary (a non-expansionary) period, the impact of an oil price shock lowers (elevates) economic uncertainty. The empirical evidence from the three model types taken together indicate a presence of state dependence on the influence of an oil price shock.