Identifying Uncertainty Shocks Due to Geopolitical Swings in Korea

82 Pages Posted: 19 Oct 2018

See all articles by Seohyun Lee

Seohyun Lee

International Monetary Fund (IMF) - Asia and Pacific Department; Bank of Korea - Economic Research Institute

Inhwan So

Bank of Korea - Economic Research Institute

Jongrim Ha

World Bank

Date Written: September 4, 2018

Abstract

Using a novel set of instrumental variables in a structural VAR framework, we investigate the economic impact of uncertainty shocks stemming from geopolitical swings in South Korea. We construct robust instrumental variables for examining the variations in uncertainty due to geopolitical swings by observing high-frequency changes in financial asset returns and their volatilities at around the times of such geopolitical events. Our empirical results show that heightened (reduced) geopolitical uncertainty has a negative (positive) impact on macroeconomic outcomes in South Korea. We provide evidence that financial and capital market movements – fluctuations in exchange rates and sovereign spreads, changes in financial asset prices and market volatility, and swings in foreign investment – play important roles in the transmission of uncertainty shocks.

Keywords: Uncertainty, Geopolitical risk, IV SVAR, South and North Korea

JEL Classification: C32, D81, E32

Suggested Citation

Lee, Seohyun and So, Inhwan and Ha, Jongrim, Identifying Uncertainty Shocks Due to Geopolitical Swings in Korea (September 4, 2018). Bank of Korea WP 2018-26. Available at SSRN: https://ssrn.com/abstract=3243628 or http://dx.doi.org/10.2139/ssrn.3243628

Seohyun Lee (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Inhwan So

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Jongrim Ha

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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