Conditional effects of local and global risk factors on the co-movements between economic growth and inflation: Insights into G8 economies

Abstract

World economies have experienced rise in uncertainties which has caused misalignments in the already existing nexus between inflation and economic growth. In addition to this, the presence of nonlinearities, asymmetry, heterogeneity, and structural shocks in time series data concerning substantial fluctuations that span systemic crises have rendered time and/or frequency connectedness worthy of investigation. Due to limited studies in this regard, the authors investigated the risk synchronisation among Gross Domestic Product (GDP), Consumer Price Index (CPI), Economic Policy Uncertainty (EPU) and Geopolitical Risk with insights from G8 countries. To achieve the study's purpose, estimation techniques employed included the wavelet approaches (bi-wavelet and partial wavelet), and the wavelet multiple as well as the DCC-GARCH Connectedness approach as robustness. A sample period from January 1997 to August 2021 restricted by consistent data availability was considered. It was discovered that most G8 nations have a comparable relationship between their GDP and CPI. Additionally, significant co-movements between the G8 nations' GDP and CPI straddle crises. Furthermore, the relationship between Russia's GDP and CPI was significantly conditionally influenced by geopolitical risk factors. Own country economic policy uncertainty was the main source of shocks for nations like Canada, France, and the US, whereas, in Germany, Italy, and the UK, Global EPU was a crucial conduit for reducing the lead-lag relationship between GDP and CPI. Outcomes from this study imply that uncertainties pose a more persistent and dynamic challenge to the G8 countries' efforts to achieve sustained economic growth, lessen the negative effects of inflation and deflation, and improve national and regional economic integration.