The economic impact of conflict-related and policy uncertainty shocks: the case of Russia

The economic impact of conflict-related and policy uncertainty shocks: the case of Russia

Series: Working Papers. 2242.

Author: Marina Diakonova, Corinna Ghirelli, Luis Molina and Javier J. Pérez.

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Summary

We show how policy uncertainty and conflict-related shocks impact the dynamics of economic activity (GDP) in Russia. We use alternative indicators of “conflict”, relating to specific aspects of this general concept: geopolitical risk, social unrest, outbreaks of political violence and escalations into internal armed conflict. For policy uncertainty we employ the workhorse economic policy uncertainty (EPU) indicator. We use two distinct but complementary empirical approaches. The first is based on a time series mixed-frequency forecasting model. We show that the indicators provide useful information for forecasting GDP in the short run, even when controlling for a comprehensive set of standard high-frequency macro-financial variables. The second approach, is a SVAR model. We show that negative shocks to the selected indicators lead to economic slowdown, with a persistent drop in GDP growth and a short-lived but large increase in country risk.

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