Multi-faceted US uncertainty connectedness with domestic and global geopolitical risk

Abstract

PurposeThis paper aims to explore the spillover impacts that domestic or global aspects of geopolitical risk generate on uncertainty. The latter is derived from a spectrum of different sources in the USA (economic policy, monetary policy, fiscal policy, national security, government spending, taxation) from 1985 up to November 2022.Design/methodology/approachVector autoregressive schemes are used to detect causality and reverse causality between each aspect of geopolitical risk and each source of US uncertainty.FindingsNotably, national security generates higher geopolitical risk by almost 8% in the first month but decreases GPR by 2% in the third month after the shock. USA is found to constitute a cornerstone as regards global peace and that the overall economic or monetary conditions or war status in the USA are remarkably more influential toward domestic and global geopolitical uncertainty than separate strands of fiscal policymaking. Reverse causality displays sizably weaker effects overall.Originality/valueThis study sheds light on the determinants of geopolitical risk and domestic instability by an international perspective and provides a compass for better decision-making for fiscal and monetary policymakers and market participants.