Assessing the impact of economic and geopolitical uncertainty on inflation: An asymmetric perspective

Abstract

This dissertation has a two-fold aim. First, to investigate the spillovers of inflation, economic, and geopolitical uncertainty across prominent global economies. Second, to assess the impact of economic and geopolitical uncertainty on inflation in the United States, China, Russia, and India, using monthly data for the period 2000M1-2022M3. To account for nonlinearities, we follow Ando et al. (2022) by applying the quantile connectedness methodology, which allows capturing non gaussian effects. Further, we proceed by performing a quantile regression to examine the effects of economic and geopolitical uncertainty on inflation. We contribute to the existing literature in two ways. First, by applying asymmetric econometric methodologies to examine the spillovers of inflation, economic, and geopolitical uncertainty. Second, by exploring the macroeconomic channels through which the impact of economic and geopolitical uncertainty is transmitted to inflation. Our results have two strong policy implications. First, as the adverse uncertainty shocks dominate the beneficial, to counterbalance the effects of an adverse inflation or uncertainty shock a larger beneficial shock is required. Second, in the case of an adverse shock, either economic or geopolitical, policy makers in Russia and USA should strengthen demand, thus following expansionary fiscal or monetary policy, while policy makers in China and India should take measures to decrease inflationary pressures.