Geopolitics and Monetary Fragmentation: Implications for Macro-Monetary Stability

IMF’s International Monetary Stability Report (April 2023) has a chapter on influence of geopolitical dangers on monetary system:

Rising geopolitical tensions amongst main economies have intensified considerations about international financial and monetary fragmentation, which may have probably essential implications for international monetary stability. Fragmentation induced by geopolitical tensions may have an effect on the cross-border allocation of capital, worldwide cost programs, and asset costs.

This might pose macro-financial stability dangers by growing banks’ funding prices, lowering their profitability, and decreasing the availability of credit score to the personal sector. Better monetary fragmentation may additionally exacerbate capital circulate and macro-financial volatility by limiting worldwide danger diversification.

Policymakers want to pay attention to potential monetary stability dangers related to an increase in geopolitical tensions and assess and quantify geopolitical shock transmission to monetary establishments. Monetary establishments might have to carry ample capital and liquidity buffers towards rising geopolitical dangers. The worldwide monetary security internet additionally must be buttressed by ample ranges of worldwide reserves held by international locations, central financial institution liquidity swap preparations, and precautionary credit score strains from worldwide monetary establishments.

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