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Monetary Policy Reaction to Geopolitical Risks: Some Nonlinear Evidence

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  • William Ginn

  • Jamel Saadaoui

Abstract

How do geopolitical risk shocks impact monetary policy? Based on a panel of 20 economies, we develop and estimate an augmented panel Taylor rule via linear and nonlinear local projections (LP) regression models. First, the linear model suggests that the interest rate remains relatively unchanged in the event of an uncertainty shock. Second, the result turns out to be different in the nonlinear model, where the policy reaction is muted during an expansionary state, which is operating in a manner proportional to the transitory shock. However, geopolitical risks can amplify the policy reaction during a non-expansionary period.

Suggested Citation

  • William Ginn & Jamel Saadaoui, 2024. "Monetary Policy Reaction to Geopolitical Risks: Some Nonlinear Evidence," Working Papers 2024.03, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2024.03
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    References listed on IDEAS

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    1. Hites Ahir & Nicholas Bloom & Davide Furceri, 2022. "The world uncertainty index," POID Working Papers 031, Centre for Economic Performance, LSE.
    2. Nicoletta Batini & Edward Nelson, 2001. "The Lag from Monetary Policy Actions to Inflation: Friedman Revisited," International Finance, Wiley Blackwell, vol. 4(3), pages 381-400.
    3. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Aug), pages 9-110.
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    5. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
    6. Monfort, Alain & Vitale, Giovanni & Rüffer, Rasmus & Renne, Jean-Paul, 2003. "Is Economic Activity in the G7 Synchronized? Common Shocks versus Spillover Effects," CEPR Discussion Papers 4119, C.E.P.R. Discussion Papers.
    7. repec:mpc:wpaper:06 is not listed on IDEAS
    8. Mignon, Valérie & Saadaoui, Jamel, 2024. "How do political tensions and geopolitical risks impact oil prices?," Energy Economics, Elsevier, vol. 129(C).
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    Cited by:

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    2. Emna Trabelsi, 2025. "Monetary Policy Transmission Under Global Versus Local Geopolitical Risk: Exploring Time-Varying Granger Causality, Frequency Domain, and Nonlinear Territory in Tunisia," Economies, MDPI, vol. 13(7), pages 1-68, June.

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    • E - Macroeconomics and Monetary Economics

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