Geopolitical Risk and Central Bank Independence: Evidence from Inflation and Unemployment Dynamics in Developing Eight (D-8) Countries

Basri; Muhammad Ghafur Wibowo

doi:10.66445/twe.v44i3.281736

Authors

Basri Sunan Kalijaga State Islamic University, Yogyakarta, Indonesia
Muhammad Ghafur Wibowo Faculty of Islamic Economics and Business, Sunan Kalijaga State Islamic University, Yogyakarta, Indonesia

DOI:

https://doi.org/10.66445/twe.v44i3.281736

Keywords:

Central Bank Independence, Geopolitical Risk, Inflation, Unemployment, GMM

Abstract

Recurring external shocks and domestic institutional constraints increasingly test macroeconomic stabilization in developing economies. This study examines how central bank independence (CBI) and geopolitical risk (GPR) shape inflation–unemployment dynamics in the Developing Eight (D-8) countries, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan, and Turkey over 2012–2023. Using a two-step dynamic panel GMM approach with Windmeijer-corrected standard errors and collapsed instruments, we estimate multiple specifications for inflation and unemployment that incorporate monetary (interest rate, money supply), fiscal (public debt, government expenditure, tax revenue), and macro-structural controls (e.g., growth, productivity, oil prices), alongside governance and external-sector controls. The results suggest that conventional policy levers remain relevant but operate conditionally in D-8 settings characterized by import dependence, exchange-rate pass-through, shallow financial markets, and heterogeneous institutional credibility. Higher interest rates are associated with lower inflation but higher unemployment, while public debt is consistently linked to higher macroeconomic stress. CBI does not emerge as a uniformly strong direct determinant; instead, its role is more visible through policy-transmission channels, where stronger CBI can alter the effectiveness of interest-rate and fiscal actions. A salient finding is that GPR is often associated with lower inflation, consistent with an uncertainty-driven demand-contraction channel. At the same time, its labor-market effects appear more interaction-dependent (e.g., amplifying the unemployment implications of specific fiscal responses). Overall, the evidence indicates that stabilizing inflation and unemployment in D-8 economies requires credible monetary policy complemented by budgetary discipline and shock-resilience strategies, particularly during periods of elevated geopolitical uncertainty.

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