Monetary policy spillovers in a fragmented world: the role of geopolitical risk pre- and post-COVID-19 pandemic

Abstract:
Purpose
This paper investigates the influence of geopolitical risks on the dynamic spillover of monetary policies among the United States, Canada, Australia, New Zealand, Japan and Switzerland from 1995 to 2023.

Design/methodology/approach
The time-varying parameter vector autoregressive (TVP-VAR) method is used to investigate the dynamic interconnectedness of monetary policy across the six countries. In addition, ordinary least squares (OLS) regression is applied to assess the influence of geopolitical risk on the transmission of international monetary policies, particularly before and after the COVID-19 pandemic.

Findings
Our study shows a moderate interdependence between the monetary policies of the examined countries. In the network, the monetary policies of the United States, Japan and Australia are transmitters, while Canada, New Zealand and Switzerland are receivers. In addition, geopolitical risks positively impact monetary policy. However, these impacts have turned negative in the post-COVID-19 period.

Research limitations/implications
These results suggest that policymakers should account for the spillover of monetary policies from other economies during the policy implementation process.

Practical implications
These findings may guide monetary policymakers in considering rising geopolitical risks.

Originality/value
This study enhances the theoretical understanding of monetary policy spillovers by illustrating the transmitting roles of major economies within a global network. Moreover, while existing research often examines monetary policy as an isolated phenomenon, this study demonstrates how such risks influence cross-country monetary policy spillovers differently between the pre- and post-COVID-19 periods. Thus, this study improves our understanding of monetary policy adaptability in a globalized world.