Repercussions of the Russia–Ukraine war

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Using the heteroscedasticity-based estimator of Rigobon and Sack (2005) to identify daily shocks of the Russia–Ukraine war, I assess and quantify the dynamic impact of the conflict on 86 open economies from January 2021 to November 2022. Within local projections, I show that war shocks caused considerable effects on macroeconomic conditions, financial markets, and global financial stability. Following a shock, weekly GDP fell significantly while inflation expectations and commodity prices soared, verifying the war’s nature as a contractionary supply shock. While global stock prices fell, the long-term government bond yields remained stable, implying the crisis had not triggered a flight of capital to the US, and governments remained able to borrow at the pre-war costs of funding. More concerning, a range of indicators – implied volatility, credit default swap spread, cross-currency basis – suggest a significant and sustained increase in systemic financial stress. Through a state-dependent model, I show that energy importers and nations that share borders or have close trade and military ties with the belligerents were more affected by war shocks. Taken together, these findings may inform policy responses and assist households and firms in preparing for possible contingencies arising from the war.