Geopolitical turning points and macroeconomic volatility: a bilateral identification strategy

• Proposes a new bilateral identification strategy for geopolitical shocks based on geopolitical turning points measured by Δ 2 P R I . • Shows that turning points isolate abrupt, event-driven inflections in political relations, improving signal-to-noise separation for causal inference. • Estimates dynamic causal effects of US–China geopolitical relations on real oil prices using quantile IV local projections. • Finds that improvements in US–China relations lower oil prices in the short run and raise them in the medium run, with larger effects at distribution tails. • Replicates the results for Japan–China relations, supporting external validity of the turning-point instrument and the quantile IV–LP framework. This paper constructs a new identification method to quantify bilateral geopolitical shocks—geopolitical turning points—i.e., abrupt, unforeseen state-to-state political turning points. Geopolitical shocks are captured by the second difference of the Political Relationship Index (Δ²PRI), a monthly narrative-based index constructed from Chinese government and media coverage. Unlike conventional global geopolitical risk indicators, Δ²PRI separates sudden departures from bilateral diplomatic paths so causal estimation is possible in a comparative cross-national context. Quantile instrumental variable local projections (IV-LP) are applied in the paper to estimate the dynamic and asymmetric geopolitical shock impact on world oil prices. It is estimated that US–China relational improvements lower oil prices by 0.2% in the short run and increase them by 0.3% in the medium run, with larger effects at the distribution boundaries of oil prices. Replication from Japan–China data establishes external validity. The paper adds a replicable analysis framework to explain how geopolitical shocks for dyads with heterogeneous institutional history and strategic rivalry spill over into global economic instability.