The Delayed Price of Global Fragmentation : Panel Evidence on Inflation Dynamics and Institutional Resilience Under Structural Fragmentation

Sammanfattning

This thesis examines whether geopolitical fragmentation constitutes a systematic source of inflation, and how institutional frameworks shape its transmission. Using the Geopolitical Fragmentation Index (GFI) as a measure of fragmentation, we esti- mate the dynamic inflation response to fragmentation shocks in a panel of advanced economies (AEs) and emerging and developing economies (EMDEs) using panel local projections. We further assess how monetary policy, fiscal frameworks, and exchange rate regimes condition the magnitude and persistence of inflationary e!ects. The re- sults indicate that fragmentation shocks generate a delayed but persistent inflationary response, with an initial disinflationary e!ect that is subsequently overtaken by infla- tionary pressures in the medium run. However, the magnitude and persistence are sen- sitive to the included global control. Among the institutional frameworks considered, exchange rate stability (ERS) emerges as the most e!ective single mitigating factor, whereas combinations of frameworks, particularly inflation targeting (IT) paired with ERS, provide greater resilience in the short and medium run. Energy inflation remains largely beyond the reach of domestic institutional arrangements, driven predominantly by global supply-side factors. We also find that the institutional frameworks mat- ter more for EMDEs compared to AEs. Our findings suggest that policymakers in EMDEs should prioritize the joint strengthening of monetary credibility and exchange rate management, as the complementary adoption of such frameworks proves more e!ective in dampening the inflationary consequences of geopolitical fragmentation.