Time-Varying Connectedness Between Global Uncertainties and Economic Activity in a Developing Economy Using a Dynamic Conditional Correlation — GARCH Model

As economies become increasingly interconnected, individual economies are at risk of shocks from external uncertainties ranging from fluctuations in climate regulations to geopolitical conflicts and international economic policies.

The purpose of the study is to investigate the time-varying correlation between global uncertainties (e. g., global economic policy uncertainty, climate policy uncertainty and geopolitical risk) and economic activity in a developing economy using a dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (GARCH) model.

The relevance of the research lies in the increasing interconnectedness of global economies and the subsequent exposure of individual economies to external shocks.

The scientific novelty is hinged on the study being among the first to study the relationship in Ghana. Using monthly data for the 2002–2022 period for Ghana, we estimate a multivariate GARCH model.

The results of the study indicate that climate policy uncertainty and global economic policy uncertainty are mean reverting, implying that the volatility of the variables decay slowly and persists for a longer time such that the conditional variance will eventually return to its long-term average level after being disturbed by shocks. Global uncertainties over time are strongly negatively correlated with economic activity and produce significant spikes, especially during periods of major world events.

The study recommends that policymakers need to consider the prolonged impact of global uncertainties on economic performance when designing economic policies and interventions. The significant spikes during major global events highlight the importance of crisis management and preparedness in maintaining economic stability during periods of heightened uncertainty.

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