The Nexus Between Geopolitical Risks and Confidence Measures in G7 Countries

Geopolitical risks (GPRs) and shocks such as military conflicts, terrorist attacks, and tensions of wars are known to cause significant economic downturns. The main aim of this study is to determine the nexus between geopolitical risks and both consumer and business sentiments of the G7 countries. This study is motivated by the importance of consumer and business confidence in financial and economic activities. It achieves its main aim by means of employing a panel quantile regression model and provides several key findings. First, it provides evidence that geopolitical risks do have a statistically significant negative impact on consumer confidence at a median level, with the United States as the base case. Furthermore, consumer confidence in Japan, Italy, and Canada has proved to be significantly more severely impacted by geopolitical risks at a median level. Evidence also shows that geopolitical risks have an asymmetrical impact on consumer confidence across quantiles in all countries. The results show that consumer confidence across all countries is more severely impacted by geopolitical risks during low-confidence regimes, i.e., at the 10th–30th quantiles. The negative impact tends to diminish at higher-confidence regimes, except for Japan, Canada, and Italy. Second, geopolitical risks tend to have an insignificant impact on business confidence in the United States, Japan, and Italy at a median level; however, they have proved to have a significantly negative impact on business confidence in the United Kingdom, France, Germany, and Canada. The asymmetrical relationship between geopolitical risks and the various confidence measures makes policy formulation for geopolitical risks challenging. The results of this study provide information that could be used to improve policy formulation related to geopolitical risks.