Causal relationships between inflation uncertainty, geopolitical risks, and inflation: New insights from Granger causality-in-quantiles tests

Zouheir Mighri
Statistika, 106(3): 294–313
https://doi.org/10.54694/stat.2025.57

Abstract

This study investigates the direction and magnitude of linear and nonlinear Granger causality-in-quantiles between inflation and inflation uncertainty, as well as from global geopolitical risks to inflation in Saudi Arabia over the period January 2008–December 2025. While no causality is detected in the mean, the results reveal significant quantile-dependent relationships. Linear Granger causality-in-quantiles indicates significant bidirectional causality between inflation and inflation uncertainty, with a predominantly positive and significant causal effect running from inflation to its uncertainty across most quantiles, thereby supporting the Friedman (1977) hypothesis. In contrast, nonlinear Granger causality-in-quantiles uncovers state-dependent effects, with inflation uncertainty exerting a significant negative influence on inflation at lower and middle quantiles, thereby supporting the Friedman-Ball hypothesis. Meanwhile, both linear and nonlinear Granger causalityin-quantiles reveal significant causal effects from global geopolitical risk measures to inflation across most quantiles; however, the sign analysis indicates that these effects are unstable and largely insignificant, providing no consistent or robust sign pattern linking external risk factors to inflation dynamics in Saudi Arabia. Robustness checks using the world uncertainty index confirm that global uncertainty has a limited and non-systematic influence on inflation dynamics. Overall, the findings emphasize strong state-dependent and asymmetric effects, with domestic uncertainty playing a central role, while external risk factors contribute marginally to inflation dynamics in Saudi Arabia.

Keywords
Inflation, inflation uncertainty, geopolitical risk, Granger causality-in-quantiles