Geopolitical risks, oil price shocks and inflation: Evidence from a TVP–SV–VAR approach

Abstract

Employing a TVP–SV–VAR model, this study investigates the dynamic effects of geopolitical risks, oil price shocks, and inflation from January 2000 to July 2022 in China, the US, and 27 European countries. The findings show that the relationship between geopolitical risks, oil prices and inflation changes dynamically over time. Geopolitical risks exert a more substantial influence on industrial demand for oil production than on oil supply disruptions, and therefore, they do not result in a sustained rise in oil prices. However, the heightened inflation observed since the COVID-19 pandemic stems from dwindling oil supplies, elevated oil prices, and an imbalance between industrial production and consumer demand driven by escalating geopolitical risks. Our findings suggest that governments should formulate and implement comprehensive and multifaceted policy measures to address the intricate interplay among geopolitical risks, fluctuations in oil prices, and the dynamics of inflation.