Geopolitical risk developments and the minerals industry

Raputsoane, Leroi (2025): Geopolitical risk developments and the minerals industry.

Abstract

This paper analyses the reaction of the minerals industry to geopolitical risk developments in South Africa. This is achieved by augmenting a Taylor1993 rule type central bank monetary policy reaction function with the indicator of geopolitical risk. The results provide evidence of a statistically significant effect of an increase in geopolitical risk on output of the minerals industry, which initially decreases and bottoms out after 5 months, followed by a slight recovery and another decrease, where output of the minerals industry bottoms out again after 13 months, the effect of which is statistically significant between 12 and 14 months. The results further show no statistically significant effect of output of the minerals industry on geopolitical risk implying a unidirectional nexus between these indicators. The results are consistent with the hypothesis that elevated geopolitical risk undermines cross national consumer, business and investor confidence, consequently culminating in depressed economic conditions. Geopolitical risk is important for economic activity, hence policymakers should monitor developments in geopolitical conditions to support economic growth as well as the minerals industry.

• Item Type: MPRA Paper
• Language: English
• Keywords: Geopolitical risk, Minerals industry, Economic cycles
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; F - International Economics > F2 - International Factor Movements and International Business > F20 - General; L - Industrial Organization > L7 - Industry Studies: Primary Products and Construction > L72 - Mining, Extraction, and Refining: Other Nonrenewable Resources

References

Acemoglu, D., Gancia, G., and Zilibotti, F. (2015). Offshoring and Directed Technical Change. American Economic Journal: Macroeconomics, 7(3):84–122.

Aiyar, M. S., Chen, M. J., Ebeke, C., Ebeke, M. C. H., Garcia-Saltos, M. R., Gudmundsson, T., Ilyina, M. A., Kangur, M. A., Kunaratskul, T., Rodriguez, M. S. L., et al. (2023a). Geoeconomic Fragmentation and the Future of Multilateralism. Staff Discussion Note, 2023/01. International Monetary Fund (IMF).

Aiyar, S. and Ilyina, A. (2023). Geoeconomic Fragmentation: An Overview. In Aiyar, S., Presbitero, A., and Ruta, M., editors, Geoeconomic Fragmentation: The Economic Risks from a Fractured

World Economy, pages 9–18. Centre for Economic Policy Research (CEPR) Press, London, United Kingdom.

Aiyar, S., Presbitero, A., and Ruta, M. (2023b). Geoeconomic Fragmentation: The Economic Risks from a Fractured World Economy. Centre for Economic Policy Research (CEPR) Press, London, United Kingdom.

Alfaro, L. (2023). Discussion of Geoeconomic Fragmentation and the Future of Multilateralism. In Aiyar, S., Presbitero, A., and Ruta, M., editors, Geoeconomic Fragmentation: The Economic Risks from a Fractured World Economy, pages 19—-25. Centre for Economic Policy Research (CEPR) Press, London, United Kingdom.

Attinasi, M. G. and Mancini, M. (2025). Trade Wars and Fragmentation: Insights from a New ESCB Report. VoxEU Columns, 28 March. Centre for Economic Policy Research (CEPR).

Baxter, M. and King, R. G. (1999). Measuring Business Cycles: Approximate Band Pass Filters for Economic Time Series. Review of Economics and Statistics, 81(4):575–593.

Blanchard, O. J., Hall, R. E., and Hubbard, R. G. (1986). Market Structure and MacroeconomicFluctuations. Brookings Papers on Economic Activity, 1986(2):285–338.

Blanchard, O. J. and Quah, D. (1988). The Dynamic Effects of Aggregate Demand and Supply Disturbances. Working Papers Series, 2737. National Bureau of Economic Research (NBER).

Bloom, N., Chen, S., and Mizen, P. (2018). Rising Brexit Uncertainty has Reduced Investment and Employment. VoxEU Columns, 16 November. Centre for Economic Policy Research (CEPR).

Bloom, N., Draca, M., and Van Reenen, J. (2016). Trade Induced Technical Change? The Impact Of Chinese Imports on Innovation, IT And Productivity. The review of economic studies, 83(1):87–117.

Burns, A. F. and Mitchell, W. C. (1946). Measuring Business Cycles. National Bureau of Economic Research (NBER) Books, Cambridge, Massachusetts.

Caldara, D., Conlisk, S., Iacoviello, M., and Penn, M. (2024a). Do Geopolitical Risks Raise or Lower Inflation. American Economic Review, 112(4):1194–1225.

Caldara, D., Conlisk, S., Iacoviello, M., and Penn, M. (2024b). Do Geopolitical Risks Raise or Lower Inflation? ASSA Meetings, 06 January. Federal Reserve Board of Governors (FRBG).

Caldara, D. and Iacoviello, M. (2022). Measuring Geopolitical Risk. American Economic Review, 112(4):1194–1225.

Canova, F. (2011). Methods for Applied Macroeconomic Research. Princeton University Press, Princeton, New Jersey.

Christiano, L. J. and Fitzgerald, T. J. (2003). The Band Pass Filter. International Economic Review, 44(2):435–465.

Del Negro, M. and Schorfheide, F. (2011). Bayesian Macroeconometrics. Handbook of Bayesian Econometrics, 1(7):293–387.

Diebold, F. X. and Rudebusch, G. D. (1970). Measuring Business Cycles: A Modern Perspective. Review of Economics and Statistics, 78(1):67–F77.

Dornbusch, R. (1992). The Case for Trade Liberalization in Developing Countries. Journal of Economic Perspectives, 6(1):69–85.

Eichengreen, B. and Irwin, D. A. (1995). Trade Blocs, Currency Blocs and the Reorientation of World Trade in the 1930s. Journal of International Economics, 38(1-2):1–24.

European Central Bank (ECB) (2012). Stock Prices and Economic Growth. Monthly Bulletin, October. European Central Bank (ECB).

Evans, C. and Kuttner, K. N. (1998). Can VARs Describe Monetary Policy? Working Paper Series, 9812. Federal Reserve Bank of Chicago.

Frankel, J. A. and Romer, D. H. (1999). Does Trade Cause Growth? American Economic Review, 89(3):379–399.

Friedman, M., Schwartz, A. J., et al. (1963). Money and Business Cycles. Bobbs-Merrill Company, Indianapolis, Indiana.

Gali, J. (1992). How Well Does the IS-LM Model Fit Post War US Data? The Quarterly Journal of Economics, 107(2):709–738.

Giannone, D., Banbura, M., and Reichlin, L. (2010). Large Bayesian Vector Autoregressions. Journal of Applied Econometrics, 25(1):71–92.

Giannone, D., Lenza, M., and Primiceri, G. E. (2015). Prior Selection for Vector Autoregressions. Review of Economics and Statistics, 97(2):436–451.

Gordon, R. J. (2007). The American Business Cycle: Continuity and Change, volume 25. University of Chicago Press, Chicago.

Hamilton, J. D. (1994). Time Series Analysis, volume 2. Princeton University Press, Princeton, New Jersey.

Hodrick, R. and Prescott, E. C. (1997). Postwar U.S. Business Cycles: An Empirical Investigation. Journal of Money, Credit and Banking, 29(1):1–16.

Hyndman, R. and Athanasopoulos, G. (2018). Forecasting: Principles and Practice. OTexts, Melbourne, 2nd edition.

Kadiyala, K. R. and Karlsson, S. (1997). Numerical Methods for Estimation and Inference in Bayesian VAR models. Journal of Applied Econometrics, 12(2):99–132.

Koop, G. and Korobilis, D. (2010). Bayesian Multivariate Time Series Methods for Empirical Macroeconomics. Foundations and Trends in Econometrics, 3(4):267–358.

Koop, G. M. (2013). Forecasting With Medium and Large Bayesian VARs. Journal of Applied Econometrics, 28(2):177–203.

Kydland, F. E. and Prescott, E. C. (1990). Business Cycles: Real Facts and a Monetary Myth. Quarterly Review, 4:3–18. Federal Reserve Bank of Minneapolis.

Litterman, R. (1984). Forecasting and Policy Analysis with Bayesian Vector Autoregression Models. Quarterly Review, Fall. Federal Reserve Bank of Minneapolis.

Litterman, R. B. (1979). Techniques of Forecasting Using Vector Autoregressions. Working Paper Series, 115. Federal Reserve Bank of Minneapolis.

Litterman, R. B. (1980). Bayesian Procedure for Forecasting with Vector Autoregressions. Working Paper Series, 274. Federal Reserve Bank of Minneapolis.

L¨utkepohl, H. (2005). New Introduction to Multiple Time Series Analysis. Springer Books, New York.

Mise, E., Kimand, T., and Newbold, P. (2005). On Suboptimality of the Hodrick Prescott Filter at Time Series Endpoints. Journal of Macroeconomics, 27(1):53–67.

Morgan Stanley Capital International (MSCI) (2014). Cyclical and Defensive Sectors. Indexes Methodology, June. Morgan Stanley Capital International (MSCI).

Obstfeld, M. (1994). Risk-Taking, Global Diversification and Growth. The American Economic Review, 84(5):1310–1329.

O’Hara, K. (2015). Bayesian Macroeconometrics in R. New York University Press, New York, 0.5.0 edition.

Quah, D. (1988). Sources of Business Cycle Fluctuations: Comments. Macroeconomics Annual, 3:151–155. National Bureau of Economic Research (NBER).

Ravn, M. O. and Uhlig, H. (2002). On Adjusting the Hodrick-Prescott Filter for the Frequency of Observations. Review of Economics and Statistics, 84(2):371–376.

Romer, C. D. (1986). Is the Stabilization of the Postwar Economy a Figment of the Data? The American Economic Review, 76(3):314–334.

Romer, C. D. (1993). Business Cycles. In Henderson, D. R., editor, The Fortune: Encyclopedia of Economics, volume 330.03 F745f. Warner Books.

Rudebusch, G. D. (1998). Do Measures of Monetary Policy in a VAR Make Sense? International Economic Review, 39(4):907–931.

Schwarz, G. (1978). Estimating the Dimension of a Model. Annals of Statistics, 6:461–464.

Shapiro, M. D. (1987). Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks? Working Paper Series, 2589. National Bureau of Economic Research (NBER).

Shapiro, M. D. and Watson, M. W. (1988). Sources of Business Cycle Fluctuations. Macroeconomics Annual, 3:111–156. National Bureau of Economic Research (NBER).

Sims, C. A. (1980). Macroeconomics and Reality. Journal of Economic Perspectives, 48(1):1–48.

Sims, C. A. (1989). A Nine Variable Probabilistic Macroeconomic Forecasting Model. Discussion Paper, 14. Federal Reserve Bank of Minneapolis.

Sims, C. A. and Uhlig, H. (1991). Understanding Unit Rooters: A Helicopter Tour. Econometrica, 59(6):1591–1599.

Stock, J. H. and Watson, M. W. (1999). Business Cycle Fluctuations in US Macroeconomic Time Series. Handbook of Macroeconomics, 1(Part A):3–64.

Stock, J. H. and Watson, M. W. (2001). Vector Autoregressions. Journal of Economic Perspectives, 15(4):101–115.

Taylor, J. B. (1993). Discretion Versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy, 39:195–214.