Does the impact of geopolitical risk reduce with the financial structure of an economy? A perspective from market vs. bank-based emerging economies

Abstract

In this paper, we investigate if negative effect of geopolitical risk on economic growth reduces with the financial structure of emerging economies. Although previous studies do not find market-based structure to boost economic growth, we cast a light upon why countries still opt for shifting to that structure. We mainly utilize panel autoregressive distributed lag (ARDL) for the period between 1985 and 2021 and employ country-based geopolitical risk (GPR) indices for 15 emerging markets. Findings depict that market-based structure reduces negative impact of geopolitical risk on economic growth, which might be attributed to increasing transparency and hence investors feeling less hesitant in investing market-based economies. On the other hand, we also show that market-based system reduces the adverse effects of GPR on consumption, whereas bank-based system has the same effect on investment growth in the long-run. Therefore, our paper asserts that the financial system is not irrelevant in terms of growth perspective, if the geopolitical risk is a key factor for an emerging country.