Monetary Policy Transmission Under Global Versus Local Geopolitical Risk: Exploring Time-Varying Granger Causality, Frequency Domain, and Nonlinear Territory in Tunisia
Emna Trabelsi ()
Additional contact information
Emna Trabelsi: Social and Economic Policy Analysis Laboratory, Higher Institute of Management of Tunis, University of Tunis, Tunis 2000, Tunisia
Economies, 2025, vol. 13, issue 7, 1-68
Abstract:
Using time-varying Granger causality, Neural Networks Nonlinear VAR, and Wavelet Coherence analysis, we evidence the unstable effect of the money market rate on industrial production and consumer price index in Tunisia. The effect is asymmetric and depends on geopolitical risk (low versus high). We show that global geopolitical risk has both detriments and benefits sides—it is a threat and an opportunity for monetary policy transmission mechanisms. Interacted local projections (LPs) reveal short–medium-term volatility or dampening effects, suggesting that geopolitical uncertainty might weaken the immediate impact of monetary policy on output and prices. In uncertain environments (e.g., high geopolitical risk), economic agents—households and businesses—may adopt a wait-and-see approach. They delay consumption and investment decisions, which could initially mute the impact of monetary policy. Agents may delay their responses until they gain more information about geopolitical developments. Once clarity emerges, they may adjust their behavior, aligning with the long-run effects observed in the Vector Error Correction Model (VECM). Furthermore, we identify an exacerbating investor sentiment following tightening monetary policy, during global and local geopolitical episodes. The impact is even more pronounced under conditions of high domestic weakness. Evidence is extracted through a novel composite index that we construct using Principal Component Analysis (PCA). Our results have implications for the Central Bank’s monetary policy conduct and communication practices.
Keywords: geopolitical risk; monetary policy; precautionary behavior; investor sentiment; nonlinear effect; asymmetric impact (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:
Downloads: (external link)
https://www.mdpi.com/2227-7099/13/7/185/pdf (application/pdf)
https://www.mdpi.com/2227-7099/13/7/185/ (text/html)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:13:y:2025:i:7:p:185-:d:1688738
Access Statistics for this article
Economies is currently edited by Ms. Hongyan Zhang
More articles in Economies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().