The Effect of the War in Ukraine on Global Activity and Inflation (2023)

May 27, 2022

The Effect of the War in Ukraine on Global Activity and Inflation

Dario Caldara, Sarah Conlisk, Matteo Iacoviello, and Maddie Penn1

Global geopolitical risks have soared since Russia's invasion of Ukraine. Investors, market participants, and policymakers expect that the war will exert a drag on the global economy while pushing up inflation, with a sharp increase in uncertainty and risks of severe adverse outcomes.2 As an example of these concerns, the April 2022 edition of the International Monetary Fund's World Economic Outlook contains more than 200 mentions of the word "war." Some economic effects are already materializing. The economies of Russia and Ukraine are contracting sharply as a direct result of the war and the sanctions imposed on Russia. Commodity markets are in turmoil and financial markets have been highly volatile since the start of the conflict. In light of these developments, a key question is: How much will geopolitical tensions weigh on economic activity in 2022 and beyond?

In this note, to answer this question, we first quantify the recent rise in geopolitical risks using two measures based on textual analysis: one focusing on newspapers articles, and another constructed from transcripts of firms' earnings calls. Armed with these numerical measures, we use an econometric model and recent data to provide empirical evidence on the global macroeconomic effects of movements in geopolitical risk.

Our main result suggests that the rise in geopolitical risks seen since the Russian invasion of Ukraine will have non-negligible macroeconomic effects in 2022. Relative to a no-war counterfactual, the model sees the war as reducing the level of global GDP about 1.5 percent and leading to a rise in global inflation of about 1.3 percentage points. The adverse effects of geopolitical risks in the model operate through lower consumer sentiment, higher commodity prices, and tighter financial conditions. Additionally, firm-level indicators suggest that a hit to the European economies will likely be greatest, especially in goods-producing industries.

Measurement of Geopolitical Risks

A key challenge to understanding and quantifying the effects of heightened geopolitical tensions pertains to their measurement. Our first measure is the Caldara-Iacoviello geopolitical risk (GPR) index, constructed using searches of newspaper articles that mention adverse geopolitical events and associated risks. The GPR index tracks references to wars, terrorist attacks, and any tensions among states and political actors that affects the course of international relations.3 The index starts in 1900 and is based on automated text searches of the Chicago Tribune, the New York Times, the Washington Post, and, for recent years, seven additional newspapers from the U.S., U.K., and Canada. Figure 1 plots the GPR index since 1970: spikes in the index are associated with wars, risks of war, and major terrorist events. Of note, the index spiked in the aftermath of the Russian invasion of Ukraine—in March 2022, readings of the index reached one of the highest values in the past 50 years, comparable with similar peaks during the Gulf and Iraq Wars.

Figure 1. The Geopolitical Risk Index
The Effect of the War in Ukraine on Global Activity and Inflation (1)

The two building blocks of the overall GPR index are the geopolitical threats (GPT) index, which captures concerns about scope, duration, and ramifications of geopolitical tensions and conflicts, and the geopolitical acts (GPA) index, which captures events such as the start and the actual unfolding of wars.4 As shown in the left panel of Figure 2, the GPT index, which surged between January and March, declined in April and May, consistent with the view that extreme outcomes of the war, such as direct involvement of more countries, are perhaps perceived as less likely. The GPA index also spiked in the aftermath of the invasion and is retracting, albeit more slowly.

(Video) Russia-Ukraine war, pandemic: How much trouble is the global economy in? | DW News

Figure 2. Recent Geopolitical Concerns

We complement information from the GPR index with a second, alternative measure of geopolitical risks constructed by searching the transcripts of the earnings call of globally listed firms for mentions of the Russian invasion of Ukraine.5 Concerns about the conflict have been pervasive in earnings conference calls across the globe, with 40 percent of all earnings calls held in April 2022 explicitly mentioning the conflict. As the right panel of Figure 2 shows, the geopolitical risk measure based on earnings calls shares very similar dynamics to the newspaper-based indexes, lending support to the notion that the newspaper-based GPR indexes are capturing information that is relevant to firms and investors.

Quantifying the Effects of Higher Geopolitical Risks on GDP and Inflation

Historically, periods of elevated geopolitical risks have been associated with sizable negative effects on global economic activity.6 Wars destroy human and physical capital, shift resources to less efficient uses, divert international trade and capital flows, and disrupt global supply chains. Additionally, changing perceptions about the range of outcomes of adverse geopolitical events may further weigh on economic activity by delaying firms' investment and hiring, eroding consumer confidence, and tightening financial conditions.

Our numerical measure of geopolitical risk allows us to quantify the effects of its recent spike on global economic activity. To this end, we estimate a structural vector autoregression (VAR) model and use the estimated model to quantify the effects over time of the recent spike in geopolitical tensions. The model includes monthly measures of world GDP, world inflation, global stock prices, real oil prices, the broad real dollar, commodity prices, global consumer confidence, and the geopolitical threats (GPT) and geopolitical acts (GPA) indexes.7 The VAR model uses data from January 1974 through April 2022 and includes three lags.8 We assume that changes in the GPT and GPA indexes drive all within-month fluctuations in the other economic variables, so that any contemporaneous correlation between geopolitical risks and financial variables, say, is assumed to reflect the effect of geopolitical risks on financial variables, rather than the other way around. But with a lag, each variable can affect all variables.

Figure 3 uses a historical decomposition of the estimated VAR results to simulate the effects over time on global GDP and inflation of the heightened geopolitical risks since January 2022. The rise in geopolitical risks observed thus far this year produce a drag on world GDP that builds throughout 2022, cumulating to a negative impact of around 1.7 percent on the level of global output. Similarly, the rise in geopolitical risks boosts prices, causing an increase in global inflation of 1.3 percentage points by the second half of 2022, after which the effects begin to subside.

Figure 3. Effects of the Recent Increase in Geopolitical Risk
The Effect of the War in Ukraine on Global Activity and Inflation (3)
(Video) Russia Ukraine war affect on Economy, inflation, lifestyle, high Oil prices | Geopolitics

How are geopolitical risks transmitted to the global economy? With various channels controlled for, the structural VAR estimates leave us well-positioned to answer this question. Figure 4 presents a more detailed picture of the way the global economy responds to a geopolitical risk shock. The effects of elevated geopolitical risks in 2022 are associated with declining consumer confidence and stock prices, factors that weaken aggregate demand. The exchange value of the dollar appreciates, in line with the evidence that spikes in global uncertainty and adverse risk sentiment can trigger flight-to-safety international capital flows (Forbes and Warnock, 2012). Commodity prices and oil prices increase, putting downward pressure on global activity and upward pressure on inflation.

Figure 4. Transmission Mechanisms of Higher Geopolitical Risk on Macroeconomic Variables
The Effect of the War in Ukraine on Global Activity and Inflation (4)

Country and Industry Exposure to the Conflict.

The regional nature of many geopolitical risks suggests that their economic repercussions may not be distributed evenly around the globe. We gauge the exposure of a country to the current conflict by calculating the share of firms that mention the Russian invasion of Ukraine in their quarterly earnings calls, based on the country where the firm is headquartered.9 Figure 5 visualizes country exposure in a map of the world, with warmer colors denoting higher exposure. Countries in Europe, and especially those that are in proximity to the conflict, are the most exposed. Roughly 80 percent of firms in Finland and Poland, countries sharing a border with Russia or Ukraine, are concerned about the war. For Germany, a country with high exposure to the conflict through the import of energy from Russia, the fraction of firms mentioning the conflict is 75 percent. The rest of the world does not appear to be exposed as intensely.10 All told, this evidence is suggestive of the risk that European countries may suffer relatively more from the economic fallout from the conflict.

Figure 5. Firm-Level Geopolitical Concerns by Country in 2022
The Effect of the War in Ukraine on Global Activity and Inflation (5)

The economic effects of the conflict are also likely to be heterogeneous by type of industry. Figure 6 calculates the share of firms that mention the Russian invasion of Ukraine in their quarterly earnings calls based on their industry of operation. The effect of the current conflict appears more concentrated in goods-producing industries that reportedly had been experiencing bottlenecks even before the Russian invasion, with an incidence of around 80 percent among European automobile companies. Meanwhile, industries that are less affected by supply disruptions—such as services—are less likely to express concerns over the war.

Figure 6. Firm-Level Geopolitical Concerns by Industry in 2022
The Effect of the War in Ukraine on Global Activity and Inflation (6)
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Concluding Remarks.

The increased geopolitical risks induced by the Russian invasion of Ukraine will weigh adversely on global economic conditions throughout 2022. Such effects are estimated in our model to reduce GDP and boost inflation significantly, exacerbating the policy trade-offs facing central banks around the world. While sizeable, these effects do not appear to be large enough to derail the global recovery from the pandemic. However, the future of the war is highly uncertain, and unforeseen developments in the conflict could generate further changes to geopolitical risk and worsen its economic effects.


Anayi, Lena, Nicholas Bloom, Philip Bunn, Paul Mizen, Gregory Thwaites, and Ivan Yotzov (2022), "The impact of the war in Ukraine on economic uncertainty",, 16 April.

Caldara, Dario, and Matteo Iacoviello (2022), "Measuring Geopolitical Risk," American Economic Review, vol. 112 (April), pp. 1194–225.

Cuba-Borda, Pablo, Alexander Mechanick, and Andrea Raffo (2018), "Monitoring the World Economy: A Global Conditions Index," IFDP Notes, Board of Governors of the Federal Reserve System, June 15.

Federle, Jonathan, Andre Meier, Gernot Müller, and Victor Sehn (2022), "Proximity to War: The stock market response to the Russian invasion of Ukraine", CEPR Discussion Paper 17185.

Forbes, Kristin J. and Francis E. Warnock (2012), "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, vol 88 (2), pp. 235-251.

1. Federal Reserve Board, Division of International Finance. All errors and omissions are responsibility of the authors. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System. Return to text

(Video) Gravitas: The implications of war between Russia & Ukraine

2. See, for example, the discussion on the likely effects of the war in Federal Reserve Chair Jerome Powell's press conference after the May 3-4, 2022, meeting of Federal Open Market Committee. Transcript available at Anayi et al (2022) show that the Russian invasion of Ukraine has led to an increase in several measures of economic uncertainty. Return to text

3. For a more detailed description, see Caldara and Iacoviello (2022). Return to text

4. The GPT index searches phrases in newspaper articles that are related to war, military, nuclear, and terrorist threats. The GPA index searches phrases referring to the beginning or the escalation of wars or to the occurrence of terrorist events. Return to text

5. At the firm level, we construct geopolitical concerns related to the current conflict by counting mentions of war-related words (such as "war" or "invasion") together with "Russia" or "Ukraine." Analogous, broader measures of firm-level geopolitical concerns (based on searches that do not necessarily include the words "Russia" or "Ukraine") show a similar pattern. Return to text

6. Caldara and Iacoviello (2022) show that, across countries and over time, higher geopolitical risks are associated with higher probability of economic disasters, lower expected GDP growth, and higher downside risks to GDP growth. Return to text

7. We measure stock prices with the FTSE World Dollar index, commodity prices with the S&P Goldman Sachs Commodity Index, confidence with the Organization for Economic Co-operation and Development's Consumer Confidence Index, and oil prices with the West Texas Intermediate Index. Inflation is from Global Financial Data. Monthly GDP is based on purchasing power parity and is constructed using the methodology described in Cuba-Borda, Mechanick and Raffo (2018). Return to text

8. Caldara and Iacoviello (2022) estimate a quarterly VAR model of the US economy to look at the dynamic effects of geopolitical risks. Our VAR here extends their work by using a longer sample (we start in 1970 instead of 1985), using monthly data, and looking at global rather than US effects, with a focus on inflation. Return to text

9. Caldara and Iacoviello (2022) show that high firm-level geopolitical risk—calculated using similar textual analysis techniques described in this note—reduces firm-level investment. Return to text

10. Recent work by Federle et al. (2022) highlights the spatial dimension of the economic spillovers from the Ukraine war. They identify a 'proximity penalty' in equity returns: the closer a country is to Ukraine, the more pronounced the decline in its equity market around the time the war started. Return to text

Please cite this note as:

Caldara, Dario, Sarah Conlisk, Matteo Iacoviello, and Maddie Penn (2022). "The Effect of the War in Ukraine on Global Activity and Inflation," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, May 27, 2022,

(Video) Bond Market Bounce | Bloomberg Surveillance 02/27/2023

Disclaimer: FEDS Notes are articles in which Board staff offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers and IFDP papers.


How does Ukraine war affect inflation? ›

Role of inflation in exacerbating inequality

The Russian invasion of Ukraine has continued to cause global supply chain disruptions. As a result, the prices of essential commodities such as fuel and food have increased globally. For instance, both Russia and Ukraine account for almost one-third of global wheat exports.

How does Ukraine war affect global economy? ›

The global economy is expected to slow further in the coming year as the massive and historic energy shock triggered by Russia's war of aggression against Ukraine continues to spur inflationary pressures, sapping confidence and household purchasing power and increasing risks worldwide, according to the OECD's latest ...

How is the war in Ukraine affecting the world? ›

The war disrupted global trade that was still recovering from the pandemic. Food prices have soared, since Russia and Ukraine are major suppliers of wheat and sunflower oil, and Russia is the world's top fertilizer producer.

Did the Ukraine war cause inflation? ›

The Russian invasion of Ukraine has caused inflationary expectations to soar. CFOs see inflation as one of the most significant future risks. Inflation remained persistently low during the past decade but recent surveys had revealed that CFOs were expecting upward pressure to emerge.

How does the war affect inflation? ›

Inflation has typically risen sharply both during and – especially – in the aftermath of major wars, with median inflation peaking at 8% one year after the war has ended.

Does inflation go up during war? ›

Inflation spikes higher during war and economic conflict. Price dislocation, price controls and self-rationing are facts of life during wartime.

How war can affect global economy? ›

The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies.

What are the global effects of Russia and Ukraine war? ›

One of the biggest and most common impacts of the war in Ukraine was the struggle to contain domestic prices of key commodities, thereby widening the demand-supply imbalances. In fact, global inflation has been surging since 2021. An event like the war only flared up a crisis that was waiting to happen in future.

What is causing inflation 2022? ›

This gap has been growing and indicates that a significant part of the 2021-2022 inflation surge in the United States has been due to excess growth in aggregate demand. Rising inflation, then, can be caused by both negative supply shocks and excess aggregate demand growth.

How has the Russia Ukraine war affected the economy? ›

Due to the start of the war and the sanctions imposed, direct supply chains with Russia and Ukraine, but also supply chains via Russia to Asia, have broken down. As a result, prices for many raw materials, energy, intermediate products and transportation services have increased significantly.

How does Russia and Ukraine affect the US economy? ›

American businesses depend on Russia and Ukraine for a plethora of commodities. According to data from the Observatory of Economic Complexity (Figures 1a and 1b), four critical ones— neon gas, palladium, platinum and pig iron — will be in short supply.

How the war in Ukraine is affecting developing countries? ›

Russia-Ukraine war and the global crisis: Impacts on poverty and food security in developing countries. Global food, fuel, and fertilizer prices have risen rapidly in recent months, driven in large part by the fallout from the ongoing war in Ukraine and the sanctions imposed on Russia.

Why does the war in Ukraine affect our prices? ›

Instability caused by the war will therefore negatively affect the food supply in these importing nations. Food shortages precipitated by the war are hurting food prices everywhere, with the hardest hit being developing economies where the world's poorest live.

Is the Russian war causing inflation? ›

The war has led to surging energy and food prices that are driving a galloping inflation rate and weighing on economic growth and consumer confidence.

Why did inflation increase after the war? ›

The United States has endured worse inflation before, but not in many decades. The post-World War II inflation peak reached nearly 20% in 1947, a result of the lifting of wartime price curbs, supply shortages and pent-up consumer demand.

How is the war in Ukraine affecting global food prices? ›

The supply shock provoked by the blockade of Ukrainian exports, coupled with record price levels for energy and basic commodities, led several nations to adopt export restrictions, fuelling market shocks and speculative operations, leading to unpredictability in global food supply.

Why is inflation so high in Ukraine? ›

Cost-push inflation occurs when prices rise because production costs increase, such as raw materials and wages. The demand for goods is unchanged while the supply of goods declines due to the higher costs of production.

What is causing inflation? ›

At its root, inflation is driven by too much demand relative to supply.

Why is the U.S. inflation rate so high? ›

Consumers, on the whole, are still managing to spend more, even though average wage gains over the past year haven't kept up with inflation. Many businesses, particularly larger corporations, have taken advantage of rising wages and increased consumer savings from government stimulus checks to raise their prices.

What are the 3 main causes of inflation? ›

What Causes Inflation? There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation refers to situations where there are not enough products or services being produced to keep up with demand, causing their prices to increase.

Is global inflation rising? ›

Consumer price data for June 2022 showed another month of rapid inflation, with overall inflation rising 9.1% year-over-year and core inflation (which doesn't include volatile energy and food prices) rising by 5.9%.
CountryInflation acceleration
32 more rows
Aug 4, 2022

How did the Russia Ukraine war affect the oil and gas industry? ›

In the wake of Russia's invasion of Ukraine, global oil prices soared to more than $120 a barrel amid concerns about a shortfall in global supplies from Russia. But they have fallen sharply since then as the global economy slows down and countries use less oil.

How has the Russia Ukraine war affected the global e commerce industry? ›

We monitored over 34 million transactions in both Russia and Ukraine during the 90-day period before the invasion, and 30 days after. In nearly all industries across both countries, e-commerce declined. Particularly in Ukraine, where e-commerce came to a standstill, with revenues dropping by 87%.

Why is Ukraine important to world? ›

Ukraine is an important breadbasket, producing around half of the world's sunflower oil. According to the USDA , Ukraine accounts for 15% of global trade in corn and 10% of of global wheat trade.

What does the US rely on Ukraine for? ›

In 2019, of the $1.3 billion in U.S. imports from Ukraine, the top commodity sectors were Base metals (59.0%), Agriculture products (12.0%), and Machinery and Mechanical Appliances (9.5%).

How is the Ukraine war affecting America? ›

The global food supply will likely be disrupted as well. And we can expect to face pressure from our European allies to take in Ukrainian refugees, who are now fleeing their country in droves. The war in Ukraine will also drive inflation even higher, resulting in less buying power for every American family.

What is economic impact of war? ›

Putting aside the very real human cost, war has also serious economic costs – damage to infrastructure, a decline in the working population, inflation, shortages, uncertainty, a rise in debt and disruption to normal economic activity.

Is the Ukraine war causing poverty? ›

Poverty reduction in the Caucasus and Central Asia is likely to stall due to Russia's war in Ukraine and the cost-of-living crisis, which comes on top of pandemic-related work disruptions and loss of income that impacted poor people the most.

Why do prices increase during war? ›

This apparent association is no accident: large increases in defense expenditures (principally during wars) create incentives to issue fiat money, which in turn tends to generate inflation and high price levels.

Has US inflation peaked? ›

US inflation peaked at 9.1% in June, its highest rate since 1982, as the war in Ukraine drove up energy costs and supply-chain issues in the wake of the coronavirus pandemic continued to push prices higher.

Will Russia war cause inflation? ›

The war has led to surging energy and food prices that are driving a galloping inflation rate and weighing on economic growth and consumer confidence.

How did the Ukraine war affect prices? ›

The war in Ukraine has led to the largest commodity price shock since the 1973 oil crisis, according to a new World Bank report, elevating prices for years to come. Energy prices rose 448% in the year to March, while prices for food and fertiliser rose by 84% and 222%, respectively.

What impact did the Russia Ukraine war have on fuel prices? ›

Both the invasion of Ukraine and the series of reactions from Western countries sent the prices of oil and gas soaring. The demand for hydrocarbons has increased as economies reopen and enter recovery phases.

How does the Russia Ukraine war affect the world? ›

The Russia-Ukraine war is having an outsized impact on the global supply chain, impeding the flow of goods, fueling dramatic cost increases and product shortages, and creating catastrophic food shortages around the world, according to experts at a virtual symposium hosted by the MIT Center for Transportation and ...

How is the war in Ukraine affecting markets? ›

Inflation rising, but US economy still growing

Besides raising the likelihood of market volatility, the war and sanctions are adding to inflationary pressures by disrupting exports of oil, natural gas, and wheat from Russia and Ukraine. The impacts of the conflict will likely vary depending on geography.

What is the effect of Russian Ukrainian crisis on oil prices and gold prices? ›

Oil experts say the war between Russia and Ukraine would disrupt natural gas supplies to Europe, causing prices to rise dramatically. This in return would send oil prices soaring as utilities switch to oil to generate power. They do not see the conflict having any direct impact on oil production in Russia.

Why global inflation is rising? ›

Demand and supply

But the demand for goods was so unusual it overwhelmed the supply and when demand is greater than supply, you either get shortages or you get price increases.

Why is inflation so high right now in the US? ›

Just as the economy began to level out and supply chain issues started to heal, a major foreign conflict occurred. This caused the perfect storm of demand-pull and cost-push inflation, causing some of the highest inflation rates in history.

What is the biggest cause of inflation? ›

Monetary policy is a major cause of the increase in inflation, says Stanford economist John Taylor. Inflation rises when the Federal Reserve sets too low of an interest rate or when the growth of money supply increases too rapidly – as we are seeing now, says Stanford economist John Taylor.


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