Macro–policy–geopolitics for eight economies (2000–2024) using an FSI (PCA)

International Journal of Finance, Innovation & Risk Management
2025 – Volume 1 – Issue 1 – Pages 107–136

Authors:

Imran Hussain Shah

1. University of Lahore, Lahore, Pakistan

Abstract

This study examines the factors that affect financial stability in eight major countries — China, France, Germany, India, Japan, Russia, Turkey, and the United States — from 2000 to 2024. Financial stability is measured using a Financial Stability Index (FSI) constructed using Principal Component Analysis (PCA). This index includes several vital signs, such as the percentage of loans that are not being repaid, the cost of government borrowing, the extent of stock market fluctuations, changes in currency values, the amount of debt countries owe to others, and their trade balances. To analyze these factors, the study uses data from multiple countries simultaneously. It uses two types of statistical methods — fixed- and random-effects regressions — and ensures the results are reliable by using robust standard errors. This helps account for differences in data across countries and over time. The factors that the study looks at include how well the economy is doing (like GDP growth, inflation, how much a country trades with others, its overall balance of payments, and how much foreign money it has), what the government does (like interest rates set by central banks and how well banks are performing), and how much uncertainty or risk there is from international politics (like economic uncertainty, geopolitical risk, and the use of sanctions). Before starting the primary analysis, the researchers first check the data by examining basic summaries, how different factors are related, and whether the data are stable over time. This helps make sure the results are trustworthy. The early findings suggest that faster economic growth, higher levels of foreign reserves, and better trade balances are associated with greater financial stability. Nevertheless, high inflation, more bad loans, and greater market volatility are associated with lower stability. Politically risky situations and the use of sanctions are also seen to hurt financial stability, and this effect is more potent in developing countries. The study examines how economic performance, government decisions, and international politics interact to influence financial stability. The results help government officials develop better plans to keep the economy stable, even amid uncertainty or international tensions. It also adds to the existing research by examining all these factors within a single model that combines macroeconomic, policy, and geopolitical influences.

International Journal of Finance, Innovation & Risk Management
2025 – Volume 1 – Issue 1 – Pages 107–136

Authors:

Imran Hussain Shah

1. University of Lahore, Lahore, Pakistan

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