Abstract

In this paper, we investigate if negative effect of geopolitical risk on economic growth reduces with the financial structure of emerging economies. Although previous studies do not find market-based structure to boost economic growth, we cast a light upon why countries still opt for shifting to that structure. We mainly utilize panel autoregressive distributed lag (ARDL) for the period between 1985 and 2021 and employ country-based geopolitical risk (GPR) indices for 15 emerging markets. Findings depict that market-based structure reduces negative impact of geopolitical risk on economic growth, which might be attributed to increasing transparency and hence investors feeling less hesitant in investing market-based economies. On the other hand, we also show that market-based system reduces the adverse effects of GPR on consumption, whereas bank-based system has the same effect on investment growth in the long-run. Therefore, our paper asserts that the financial system is not irrelevant in terms of growth perspective, if the geopolitical risk is a key factor for an emerging country.

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