Quantifying Macroeconomic Spillovers

Geopolitical conflicts generate macroeconomic spillovers that extend beyond directly affected countries through trade and commodity linkages. This paper quantifies these effects for Germany, France, Italy, and Spain using a monthly Trade-Related Conflict Exposure (TRCE) index for 2009–2023 within an external-instrument Structural Vector Autoregression (SVAR) framework. We find that conflict shocks transmitted via import channels significantly affect industrial production and inflation. Headline inflation responds in a hump-shaped pattern, with peak effects of around 0.30 percentage points in Germany and 0.18 percentage points in France. Energy prices react immediately and strongly, food prices more gradually, and core inflation rises persistently in Germany, France, and Spain, indicating broader second-round effects. Historical decompositions show that conflict shocks account for a substantial share of the 2022–2023 inflation surge. Overall, the results highlight the importance of trade integration and commodity-specific exposure in shaping asymmetric inflation dynamics within the Euro Area.