Exploring the relationship between geopolitical risk, economic policy uncertainty and inflation expectation in the United States

Abstract

The study examines the relationship between geopolitical risk, economic policy uncertainty, and inflation expectations in the United States using monthly data from January 1994 to October 2022. Results from the ARDL model highlight significant short-run associations, showing that geopolitical risk is positively linked to inflation expectations, suggesting its complex influence on inflation dynamics in the short term. In contrast, no significant long-run relationships are identified between economic policy uncertainty, geopolitical risk, and inflation expectations. Additionally, variables such as industrial production, energy prices, oil prices, money supply, and exchange rates are found to be key contributors to fluctuations in inflation expectations. Based on the empirical findings, the study offers policy recommendations aimed at managing inflation expectations, including close monitoring of geopolitical risks, stabilizing energy and oil prices, and fostering industrial growth to mitigate inflationary pressures.