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Are We Fragmented Yet? Measuring Geopolitical Fragmentation and Its Causal Effects

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  • Fernández-Villaverde, Jesús
  • Mineyama, Tomohide
  • Song, Dongho
Abstract
After decades of rising global economic integration, the world economy is now fragmenting. To measure this phenomenon, we introduce an index of geopolitical fragmentation derived from various empirical indicators. This index is developed using a flexible dynamic factor model with time-varying parameters and stochastic volatility. We then employ structural vector autoregressions and local projections to assess the causal effects of changes in fragmentation. Our analysis demonstrates that increased fragmentation negatively impacts the global economy, with emerging economies suffering more than advanced ones. Notably, we document a key asymmetry: fragmentation has an immediate negative effect, while the benefits of reduced fragmentation unfold gradually. A sectoral analysis within OECD economies reveals that industries closely linked to global markets ---such as manufacturing, construction, finance, and wholesale and retail trade--- are adversely affected. Finally, we examine the interaction between fragmentation and the economic dynamics of regional economic blocs, highlighting significant differences in the impacts across various geopolitical blocs.

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  • Fernández-Villaverde, Jesús & Mineyama, Tomohide & Song, Dongho, 2024. "Are We Fragmented Yet? Measuring Geopolitical Fragmentation and Its Causal Effects," CEPR Discussion Papers 19184, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19184
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    Cited by:

    1. Norring, Anni, 2024. "The economic effects of geoeconomic fragmentation," BOFIT Policy Briefs 8/2024, Bank of Finland Institute for Emerging Economies (BOFIT).

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    More about this item

    Keywords

    Dynamic factor model;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F01 - International Economics - - General - - - Global Outlook
    • F2 - International Economics - - International Factor Movements and International Business
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization

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