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Geopolitics Meets Monetary Policy: Decoding Their Impact on Cross-Border Bank Lending

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Abstract

We use bilateral cross-border bank claims by nationality to assess the effects of geopolitics on cross-border bank flows. We show that a rise in geopolitical tensions between countries — disagreements in UN voting, broad sanctions, or sentiments captured by geopolitical risk indices — significantly dampens cross-border bank lending. Elevated geopolitical tensions also amplify the international transmission of monetary policies of major central banks, especially when geopolitical tensions coincide with monetary policy tightening. Overall, our results suggest that geopolitics is roughly as important as monetary policy in driving cross-border lending.

Suggested Citation

  • Swapan-Kumar Pradhan & Viktors Stebunovs & Előd Takáts & Judit Temesvary, 2025. "Geopolitics Meets Monetary Policy: Decoding Their Impact on Cross-Border Bank Lending," International Finance Discussion Papers 1403, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1403
    DOI: 10.17016/IFDP.2025.1403
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    Keywords

    Monetary policy; Geopolitical tensions; Cross-border claims; Diff-in-diff estimations;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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