Measuring geoeconomic tension: a large-language-model approach for the euro area

We construct an index of geopolitical and geoeconomic tension for the euro area using Large-Language Models (LLMs) that prompt a large dataset of European, local-language newspaper articles. The resulting LLM Geoeconomic and Geopolitical Tension (LGPT) index and its subindices seek to provide an accurate narrative of tensions and their sources over the past quarter century. The multilingual LLM approach allows for a separation between geopolitical and geoeconomic tensions and for granularity in the identification of the source of such tensions including trade, energy and finance. This lends itself to more accurate economic analysis of the impact of geopolitics and geoeconomics on the euro area economy. The LLM approach is efficient and capable among other things of extracting trends regarding the international institutional actors involved in developments. We also illustrate one potential use of the index by estimating the impact of geoeconomic tensions on output and inflation in the euro area in a Bayesian structural VAR framework.