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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

    as
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    3. 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.
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    More about this item

    Keywords

    monetary policy; linear and nonlinear local projections; geopolitical risk; economic policy uncertainty;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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