Do Geopolitical Shocks Drive Currency Volatility? New Evidence from a TVP-VAR Framework

Exchange rate dynamics in OECD economies have been increasingly shaped by geopolitical tensions and systemic crises. Between 2010 and 2025, a sequence of major events including the European sovereign debt crisis, the COVID-19 pandemic, and the Russia–Ukraine conflict has amplified uncertainty and volatility in global financial markets. Using a Bayesian Time-Varying Parameter Vector Autoregression (TVP-VAR) model, this analysis investigates how geopolitical shocks are transmitted to exchange rate movements against the US dollar, capturing structural breaks, stochastic volatility, and heterogeneous time-varying relationships across countries. The empirical evidence reveals that exchange rates respond significantly but asymmetrically to geopolitical shocks, with more pronounced effects during periods of global turmoil and weaker reactions in stable phases. Furthermore, the sensitivity of exchange rates to geopolitical risk differs across economies, depending on institutional quality, trade exposure, and macroeconomic resilience. These findings highlight important asymmetries in the transmission of geopolitical uncertainty and underscore the heterogeneity of policy responses among advanced economies. From a practical perspective, the results provide valuable guidance for policymakers and international investors seeking to integrate geopolitical risk into monetary, fiscal, and risk management frameworks.