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Monetary Policy Reaction to Geopolitical Risks: Some Nonlinear Evidence

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  • William Ginn
  • Jamel Saadaou

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 Saadaou, 2024. "Monetary Policy Reaction to Geopolitical Risks: Some Nonlinear Evidence," Working Papers of BETA 2024-16, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2024-16
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    File URL: http://beta.u-strasbg.fr/WP/2024/2024-16.pdf
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    References listed on IDEAS

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    1. Saadaoui, Jamel & Smyth, Russell & Vespignani, Joaquin, 2025. "Ensuring the security of the clean energy transition: Examining the impact of geopolitical risk on the price of critical minerals," Energy Economics, Elsevier, vol. 142(C).

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    JEL classification:

    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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