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Monetary Policy Reaction to Geopolitical Risks in Unstable Environments
INFER Working paper 2024.03 (Updated 9 September 2024)
32 Pages Posted: 17 Apr 2024
Date Written: August 27, 2024
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 constant and time-varying local projection (TV-LP) 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 GPR 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 Policy, Local Projections, Time-varying Local Projections, Geopolitical Risk
JEL Classification: F44, E44, E43, F51
Suggested Citation: Suggested Citation
Ginn, William and Saadaoui, Jamel,
Monetary Policy Reaction to Geopolitical Risks in Unstable Environments
(August 27, 2024). INFER Working paper 2024.03 (Updated 9 September 2024), Available at SSRN: https://ssrn.com/abstract=4762672 or http://dx.doi.org/10.2139/ssrn.4762672
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