Geopolitical Risk and Exchange Rate Dynamics Across Country Groups: Evidence from Panel Local Projections

Geopolitical tensions have become a major source of global financial instability, yet their transmission through foreign exchange markets remains insufficiently understood. This paper examines how exchange rates adjust to geopolitical risk shocks and whether this adjustment differs across countries with distinct institutional and monetary frameworks.Using a large panel of international currencies and a dynamic empirical framework, we estimate the cumulative response of exchange rates to geopolitical risk shocks over multiple horizons. To capture structural heterogeneity in the international monetary system, the analysis is conducted separately across four country groups: Central and Eastern European economies, advanced economies, emerging non-OECD economies, and economies operating under quasi-fixed exchange rate regimes.The results reveal strong cross-country heterogeneity in the transmission of geopolitical risk. While the average response of exchange rates appears weak in pooled samples, this masks economically meaningful differences across country groups. The most pronounced and persistent adjustments occur in quasi-fixed exchange rate regimes, where currencies display delayed but sizable responses to geopolitical shocks. By contrast, exchange rate reactions in advanced and broader emerging economies are weaker and less systematic.These findings highlight the importance of exchange rate regimes in shaping the international financial transmission of geopolitical risk and provide new evidence that currency markets constitute a key channel through which geopolitical tensions propagate across the global economy.