by Marco Albori
This policy brief reviews recent evidence on how geopolitical tensions and political divides affect cross-border capital flows. Geopolitical risk systematically reduces flows across asset classes, with the sharpest effects on those towards emerging economies. Political alignment also matters and increasingly shapes the geography of international investment, with signs of bloc-based allocations, especially in strategic sectors and, to some extent, in Europe after the Russian invasion of Ukraine. These findings underscore the growing influence of geopolitics on global finance and raise important policy and research questions about the implications of fragmentation for macroeconomic and financial stability.
The opinions expressed in this paper are those of the author and do not necessarily reflect the views of the Bank of Italy or the Eurosystem. This policy brief is based on Bank of Italy, Occasional Paper No 974.
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Politics will tear us apart, again. Geopolitical risk, fragmentation, and capital flows