Macroeconomic effects of global policy and financial risks

Abstract

AbstractGlobalization has brought larger spillovers of global risks across borders since the 2000s. Specifically, global policy risk has sharply increased due to policy uncertainty in major countries in the recent decade as are shown in the Brexit, the US‐China trade friction and the COVID‐19 pandemic. This paper empirically investigates effects of both global policy risk and global financial risk on macroeconomy and financial markets in eight major countries from January 1997 to June 2020. We employed a structural vector autoregressive framework to obtain interesting empirical results. First, global risks have recessionary effects on the macroeconomy, reducing production, deteriorating employment, lowering long‐term interest rates, depressing prices and reducing global trade. Second, global risks also have recessionary effects on financial markets, plunging stock prices, appreciating the safe‐haven currencies and depreciating the other currencies. Third, the macroeconomies and the financial markets respond to the global financial risk more significantly than the global policy risk. Fourth, the recessionary effects of global risks vary depending on countries.