Modeling the Impact of Political Risk Components on Major Macroeconomic Variables

Abstract

The risks of the political conditions prevailing in an economy are found to have a significant impact on its stock market. Such political risks can distort the entire economy. This study investigated the impact of political risk on major macroeconomic variables which are the indicators of growth in any economy by considering the various components of political risk as given by World Bank’s worldwide governance indicators. Using a panel data approach, it modeled the major macroeconomic variables of eleven emerging and frontier Asian economies with various components of political risk. The study found that irrespective of the inter-linkages among different macroeconomic variables, they were not affected by the same political risk components. Most importantly, it revealed that GDP did not respond to any of the political risk components, whereas the exchange rate was found to be affected by all the political risk components. The study also found that FDI, inflation, and real interest rate were affected by one or more political risk components.