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Ease on the Cannons, Tighten on the Trumpets: Geopolitical Risk and the Transmission of Monetary Policy Shocks

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  • Jochen Güntner
  • Johannes Henßler

Abstract

Recent advances in the use of high-frequency external instruments to separate the signaling channel of monetary policy from exogenous interest rate changes have solved a number of puzzling responses to supposedly contractionary monetary policy shocks. We show that their effects on U.S. banks' balance sheets, asset markets, and economic activity hinge on the level of geopolitical risk at the time of the FOMC announcement. The S&P500 falls and credit spreads rise by more, while bank balance sheets contract, if geopolitical risk is above its sample median in the quarter or month of the shock. The state-dependent e ects are due to a tightening of credit- and risk-related national financial conditions and imply that, while preparing its monetary policy decisions, the Board of Governors should also keep track of the geopolitical environment.

Suggested Citation

  • Jochen Güntner & Johannes Henßler, 2021. "Ease on the Cannons, Tighten on the Trumpets: Geopolitical Risk and the Transmission of Monetary Policy Shocks," Economics working papers 2021-09, Department of Economics, Johannes Kepler University Linz, Austria.
    • Handle: RePEc:jku:econwp:2021-09
    Note: English
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    References listed on IDEAS

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    More about this item

    Keywords

    C&I loans; Geopolitical risk; Monetary policy; State-dependent effects;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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