Geopolitical risk and business confidence in Türkiye: Evidence from time-varying Granger causality

The Russia-Ukraine conflict has renewed interest in geopolitical risk and its impacts. Although many studies have investigated how geopolitical risk affects financial performance and real economic activities, surprisingly, the literature has remained silent on the relationship between geopolitical risk and business confidence. This study examines the time-varying Granger causality between global geopolitical risk and its two components, as well as country-specific geopolitical risk and business confidence, over the period January 1991-January 2024 in the context of an emerging economy, Türkiye. We find that global geopolitical risk, its two components (geopolitical acts and geopolitical threats), and country-specific geopolitical risk Granger-cause business confidence. One notable result is that compared to geopolitical threats, geopolitical acts (war, sanctions, tariffs, political unrest, and terrorist attacks) Granger-cause business confidence in more periods. Overall, these results suggest that changes in global and country-specific geopolitical risks effectively predict changes in business confidence. Robustness tests corroborate our baseline findings. The evidence we present can help policymakers and scholars in better understanding the dynamics of business confidence during periods of heightened global and domestic geopolitical risk.