The impact of the EU’s sanctions on Russia and their monetary policy implications for the ECB

Details

Supervisors

Rychalovska, Yuliya

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

enA study using a Phillips Curve and Bayesian SVAR models to determine the impact of the European sanctions on Russia on the euro-area’s economy. The goal is to find the transmission channels by which these sanctions could have had an effect on inflation and see if they can be linked to the unprecedented inflation level the EU encountered in 2022. By using the newly created Geopolitical Risk (GPR) index, this paper focuses on the tensions between the EU and Russia and how they have impacted both inflation and monetary policy. The results show that the main drivers of inflation during the shock of 2022 were the gas price and producer price index (PPI), both of which were amplified by the GPR index. Moreover, the analysis highlights a positive correlation between geopolitical risk and inflation, a relation in line with what was found in other recent studies on the subject. Both the sanctions and the high GPR are found to be sources of higher inflation persistence across the euro-area, which suggests that when geopolitical tensions are high, they affect monetary policy decisions and should thus be kept in mind. Incorporating a measure of this risk in forecasting models could thus give some beneficial insights to policymakers.