Geopolitical Turning Points and Oil Price Responses: An IV-LP Approach

Jamel Saadaoui

MPRA Paper from University Library of Munich, Germany

Abstract: This paper introduces a novel identification strategy of geopolitical turning points, defined as sharp, unanticipated inflection points in bilateral relations. These shocks are measured using the second difference of the Political Relationship Index (Δ²PRI), an event-based monthly index derived from Chinese sources. Unlike standard geopolitical risk indices, Δ²PRI isolates events that represent exogenous shifts in diplomatic relationships. Using quantile IV-local projections, the paper studies the causal and asymmetric impact of these shocks on global oil prices. An improvement in US–China relations reduces oil prices by 0.2% in the short run and raises them by 0.3% in the medium run, with effects varying across the oil price distribution. The extension to the Japan–China dyad supports external validity. The Δ²PRI instrument offers a reusable framework for analyzing bilateral political shocks across various macroeconomic outcomes, making a methodological contribution to the international economics literature.

Keywords: Geopolitical Risk; Oil Prices; Quantile Local Projections; Instrumental Variables. (search for similar items in EconPapers)
JEL-codes: C26 C32 F41 F51 (search for similar items in EconPapers)
Date: 2025-01-31
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:125586

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