When Foreign Wars Abroad Hit Wallets at Home

By Yuriy Gorodnichenko and Olivier Coibion

What do the wars in Ukraine and the Middle East mean for your grocery bill, your savings, and your spending decisions? For most of us, they feel like tragedies happening far away. But new evidence shows they reach into our households in subtle yet powerful ways — by reshaping how people view the economic future.

The Hidden Front

Wars don’t just destroy cities and lives where they are fought. They also ripple outward, creating uncertainty in energy markets, disrupting global trade, and rattling financial markets. That much is obvious.

What’s less obvious is how they change the way ordinary consumers think about the economy — and therefore how they behave. When people fear the future will be worse, they spend less today. And when millions of households do this at once, recessions can follow.

Economists have long suspected this. The Gulf War coincided with the 1990–91 U.S. recession, as consumer confidence fell sharply. After the Brexit referendum, U.K. households pulled back spending. And when Russian tanks rolled into Ukraine in 2022, European confidence indicators plunged. But were those just correlations, or did the wars cause people to spend less?

That’s the question my co-authors and I set out to answer.

Running a Thought Experiment at Scale

Together with colleagues at the European Central Bank, we fielded a large-scale survey of euro-area households. We couldn’t randomly assign people to live in a world with or without war. But we could do the next best thing: randomize how long respondents were told the current wars might last.

Some were told the conflicts would end within months. Others were told they might drag on for years. Then we asked how they thought that scenario would affect prices, growth, stock markets, government debt, their own financial situation, and their spending.

Because the scenarios were randomly assigned, differences in responses capture the causal effect of perceived geopolitical risk.

The results were striking.

A Stagflationary Future

When people imagine a longer war, their expectations shift sharply.

• They expect higher inflation.
• They expect lower growth.
• They expect rising unemployment.
• They expect falling stock prices and weaker trade.
• They expect governments to pile up debt and raise taxes.

In other words: prolonged geopolitical risk looks stagflationary to households.

Figure 1 (adapted from our paper’s Figure 3) shows this clearly: the longer the expected conflict, the darker the collective outlook.

From National Outlook to Personal Wallets

But this isn’t just about “the economy.” People also bring it home. Asked about their own financial situation, households facing the “long war” scenario were much more likely to say they’d be worse off. That pessimism translated into expected cuts in spending — especially on big-ticket items like appliances, cars, or vacations.

Using panel data from the survey, we can actually see the same households spending less when their geopolitical concerns rise. On average, a modest increase in geopolitical worries led to a nearly 1% drop in nondurable spending (food, clothing, etc.) and a 4–5% drop in durable spending (furniture, electronics, cars).

Figure 2 (adapted from our paper’s Figure 4) shows how consumption expectations fall as the expected duration of war rises.

What This Means for the U.S.

Although our data come from Europe, the lessons extend across the Atlantic. American consumers also react strongly to geopolitical shocks. After Iraq invaded Kuwait in 1990, U.S. consumer confidence collapsed, helping tip the economy into recession. More recently, spikes in geopolitical risk indexes have coincided with jumps in gas prices and drops in consumer sentiment in the U.S.

The timing matters. The United States is already in what looks uncomfortably close to a stagflationary environment: growth has slowed, productivity is weak, while inflation remains above target. Wars abroad that reinforce these stagflationary expectations — higher prices, lower growth — can make an already delicate balance much harder to manage.

This is where central bank independence comes in. If households start doubting that the Federal Reserve will be able — or willing — to keep inflation in check when geopolitical shocks hit, expectations can become unanchored. And once inflation expectations drift upward, they feed into wage demands, pricing decisions, and borrowing costs, making stagflation more entrenched.

The Danger of Normalizing Crisis

One lesson from our findings is that uncertainty fatigue can have real costs. If consumers come to see endless war as the “new normal,” their lower spending could become self-fulfilling, dragging down economies already strained by climate change, technological upheaval, and populist politics.

That may help explain why leaders like Christine Lagarde of the ECB warned early on that “a long-lasting war in Ukraine remains a significant risk” for European confidence. She was right — not just politically, but economically. And the same message should resonate in Washington: foreign policy doesn’t just shape geopolitics. It shapes Main Street wallets, and it tests whether central banks can maintain credibility in the face of political pressure.

What To Do About It

Policymakers can’t stop wars on their own. But they can mitigate how wars shape expectations. Clear communication about energy security, fiscal discipline, and long-term resilience can help counter the drumbeat of pessimism. So can targeted transfers to households most vulnerable to shocks.

For central banks, the challenge is sharper: to remain committed to price stability even when geopolitical risks push growth lower. That is precisely why central bank independence is so critical. If monetary policy bends too easily to short-term political pressures in the face of stagflationary shocks, the costs of regaining credibility later will be even greater.

Conclusion

Wars abroad may feel far away. But their shadows stretch into our supermarkets, our job prospects, and our wallets. As our research shows, the fear of protracted conflict alone is enough to slow spending and growth.

In a world where geopolitical crises seem permanent, the battle for economic stability won’t just be fought with tanks or tariffs. It will also be fought in central banks, in fiscal policy debates, and in the expectations that guide the everyday decisions of households.