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Macroeconomic effects of political risk shocks

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  • Hacioglu Hoke, Sinem

    (Bank of England and Data Analytics for Finance and Macro (KCL))

Abstract

We investigate the macroeconomic effects of political risk in an information-rich SVAR. Using an external instrument based on an index of US partisan conflict for identification, we find that reduced political risk has expansionary impact: it is immediately priced into stock prices; increases firms’ credit availability, employment and investments while households invest and consume more — ultimately output rises. As an important driver of economic dynamics in medium to long term, the shock create an aggregate supply effect where output growth and inflation move in opposite directions, and generates a trade-off between inflation stabilization and output growth during turbulent periods. Key words: political risk shocks, partisan conflict, identification with external instruments.

Suggested Citation

  • Hacioglu Hoke, Sinem, 2019. "Macroeconomic effects of political risk shocks," Bank of England working papers 841, Bank of England.
    • Handle: RePEc:boe:boeewp:0841
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    More about this item

    Keywords

    Political; Risk; Shocks;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics

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