Is geopolitical risk always detrimental to economic growth?

Saakshi Jha (), Sunny Bhushan () and Nupur Nirola ()
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Saakshi Jha: Indian Institute of Management Ranchi
Sunny Bhushan: Symbiosis International (Deemed University)
Nupur Nirola: OP Jindal Global University

Economic Change and Restructuring, 2024, vol. 57, issue 2, No 8, 31 pages

Abstract: Abstract In the recent past, geopolitical tension has taken center stage in defining macroeconomic dynamics. Given that, this study examines the impact of geopolitical risk on economic growth for 41 countries from 2000 to 2020. Our panel estimations using the feasible generalized least square (FGLS) technique show that geopolitical risk positively and significantly impacts economic growth. The results are consistent even after addressing endogeneity concerns using system GMM and auto-correlated explanatory growth variables using the PCSE estimation. Our results indicate that a percent increase in geopolitical risk increases economic growth to 3.3%. For the cohort of advanced and emerging economies, our result shows that the advanced economies can better mitigate any geopolitical shocks and experience favorable growth rates. On the other hand, emerging economies posit a detrimental impact of geopolitical risk on their economic growth, thereby indicating an asymmetric effect between the two sets of economies. Further, macroeconomic conditions and institutional factors play a significant role in determining the impact of geopolitical risk on the economic growth of 41 countries. In the presence of institutional factors like democracy and economic freedom, the relationship between geopolitical risk and economic growth remains intact. In the context of geopolitical risk, these institutional factors stimulate economic growth.

Keywords: Geopolitical risk; Economic growth; FGLS; System GMM; Macroeconomic instability; Varieties of democracy (search for similar items in EconPapers)
JEL-codes: C23 F43 O47 P16 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10644-024-09585-1

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