Title: Identifying uncertainty shocks using geopolitical swings in Korea
Authors: Seohyun Lee - Bank of Korea (Korea, South) [presenting]
Jongrim Ha - World Bank (United States)
Inhwan So - The Bank of Korea (Korea, South)
Abstract: Using a novel set of instrumental variables in a structural VAR framework, we investigate the economic impact of uncertainty shocks from geopolitical swings in South Korea. We construct robust instrumental variables for geopolitical swings by observing high-frequency changes in financial asset returns and their volatilities around such geopolitical events. Our empirical results show that heightened (reduced) geopolitical uncertainty has negative (positive) impact on macroeconomic outcomes in South Korea. We provide evidence that financial and capital markets - fluctuations in exchange rates and sovereign spreads, changes in financial asset prices and market volatility, and swings in foreign investments - play an important role in the transmission of uncertainty shocks.