Complex Global Interdependencies between Economic Policy Uncertainty and Geopolitical Risks Indices

Wataru Souma, Carolina Magda Roma, Hiromitsu Goto, Hiroshi Iyetomi and Irena Vodenska

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: We investigate the complex interdependencies of economic policy uncertainty (EPU) and geopolitical risk (GPR) indices between 37 countries. We examine leading and lagging relationships between countries to understand whether one country's EPU or GPR index may affect that of others. Policy uncertainty arises when government policy implementations are uncertain and may intensify economic cycles and substantially affect the economy. Geopolitical risk develops when tensions within a country or between countries affect the ordinary course of business or international relationships. We analyze the monthly index values for EPU and GPR between 1997 and 2020 using the complex Hilbert principal component analysis (CHPCA) to identify leading events associated with essential changes in EPU and GPR indices. CHPCA enables us to construct a weighted and directed network from the correlation matrix. We determine that the most impactful event during this period was the terrorist attack of September 11, 2001, followed by the novel coronavirus 2019 pandemic in 2020, the global financial crisis of 2008, and terrorism and the election of the new president in the United States and the prime minister in the United Kingdom in 2016. We study temporal network dynamics in EPU and GPR indices and observe significant changes in the network before and during these events.

Pages: 36 pages
Date: 2022-03
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:22028

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