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Macroeconomic effects of political risk shocks

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  • Hacıoğlu-Hoke, Sinem

Abstract

I investigate the macroeconomic effects of political risk caused by conflict among politicians in a proxy VAR. Using an external instrument based on an index of US partisan conflict for identification, I find that reduced political risk has an expansionary impact: it is immediately priced into stock prices, firms start taking more risk, it increases firms’ dividend payouts, debt issuance and credit use — ultimately output rises.

Suggested Citation

  • Hacıoğlu-Hoke, Sinem, 2024. "Macroeconomic effects of political risk shocks," Economics Letters, Elsevier, vol. 242(C).
    • Handle: RePEc:eee:ecolet:v:242:y:2024:i:c:s0165176524003616
    DOI: 10.1016/j.econlet.2024.111877
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    More about this item

    Keywords

    Political risk shocks; Partisan conflict; Identification with external instruments; Structural vector autoregressions;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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