Geopolitical risks, monetary trilemma, and global stagflation

Abstract

The recent global geopolitical events, such as the COVID-19 pandemic and the Russia-Ukraine conflict, have renewed concerns about stagflation. This study examines the impact of political and social shocks on economic growth and stagflation using annual data from 1990 to 2021 for 128 countries. Our findings indicate that significant events like the September 11 attacks, the US-China trade war, and the COVID-19 pandemic have led to a decrease in GDP growth and exacerbation of stagflation. We also explore the moderating effects of monetary trilemma in alleviating or worsening the issues of stagflation created by geopolitical risks. Financial openness correlates positively with stagflation during the US-China trade war and COVID-19 periods, pointing to its potential risk in making economies vulnerable to external shocks. Instead, maintaining stable exchange rates can help curb inflation and consequently prevent and alleviate stagflation.