Global | Geopolitics, geoeconomics and sovereign risk: different shocks,different channels

Summary

Geopolitical shocks reprice sovereign default risk directly; geoeconomic shocks bypass default risk and transmit through expected monetary policy and the global financial cycle.

Key points

• Key points:
• We document this distinction—a “scissors pattern” in which the Direct and Global Financial Cycle channels of sovereign credit default swap (CDS) spreads move in opposite directions
• A Shapley–Taylor decomposition of nonlinear machinelearning predictions partitions each observation’s spread into four channels

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