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Monetary policy reaction to geopolitical risks in unstable environments

Published online by Cambridge University Press:  31 March 2025

William Ginn  and
Jamel Saadaoui Open the ORCID record for Jamel Saadaoui [Opens in a new window]
William Ginn
Affiliation:
Labcorp, Burlington, NC, USA Coburg University of Applied Sciences, Coburg, Bayern, Germany
Jamel Saadaoui*
Affiliation:
IEE, LED, University Paris 8, Saint-Denis, France
*
Corresponding author: Jamel Saadaoui; Email: jamelsaadaoui@gmail.com
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Abstract

How do geopolitical risk shocks impact monetary policy? Based on a panel of 18 economies, we develop and estimate an augmented panel Taylor rule via constant and time-varying local projection regression models. First, the panel evidence suggests that the interest rate decreases in the short run and increases in the medium run in the event of a geopolitical risk shock. Second, the results are confirmed in the time-varying model, where the policy reaction is accommodating in the short run (1 to 2 months) to limit the negative effects on consumer sentiment. In the medium term (12 to 15 months), the central bank is more committed to combating inflation pressures.

Keywords

Monetary policyLocal projectionsTime-varying local projectionsGeopolitical riskE43E44F44F51
Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e90
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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