The Impact of Uncertainty Shocks: Evidence from Geopolitical Swings on the Korean Peninsula*

Abstract

Using a novel set of instrumental variables in a structural VAR framework, we investigate the economic impact of uncertainty shocks from geopolitical swings on the Korean Peninsula over 2003–17. We construct robust instrumental variables for these shocks based on high-frequency changes in financial asset returns and their volatilities around the geopolitical events. The empirical results suggest that heightened geopolitical uncertainty has negative impacts on macroeconomic outcomes in South Korea. We provide evidence that financial and capital markets play a key role in the transmission of geopolitical uncertainty shocks.