Geopolitical Tensions and Macro-Financial Stability Risks: Policymakers’ Role in Mitigation

As geopolitical tensions continue to rise, there is an increasing concern about the potential impact on macro-financial stability. Policymakers need to be aware of these risks and take appropriate action to safeguard global financial stability.

A recent report from the Bank for International Settlements (BIS) emphasizes the importance of a macro-financial stability framework (MFSF) in mitigating the consequences of geopolitical risks and other vulnerabilities [1]. The report outlines key features of MFSFs that can safeguard macro-financial stability, particularly in dealing with risks linked to fluctuations in external financial conditions [8].

The International Monetary Fund (IMF) also stresses that greater financial fragmentation could exacerbate capital flow and macro-financial volatility by limiting international risk diversification [2]. Policymakers are urged to assess and quantify geopolitical shock transmission to financial institutions, as geopolitical tensions can threaten financial stability through various channels, such as financial restrictions, increased uncertainty, and cross-border credit and investment outflows [5].

Moreover, there is a growing consensus among scholars and policymakers that five key global forces will be pivotal in influencing the future economy, including the importance of sustainability, particularly in the context of climate change [7]. The Federal Reserve has joined other financial regulators in warning that climate change poses significant financial risks [6]. This further underlines the importance of having a comprehensive macro-financial stability framework to address various sources of risk and maintain overall stability.

As we move forward, it is crucial for policymakers to continue monitoring the global economic landscape and adapt their policy actions to mitigate potential risks, as seen in the effective monetary and fiscal policy responses to the COVID-19 pandemic [3]. By staying vigilant and implementing well-designed macro-financial stability frameworks, policymakers can help safeguard the global economy from the adverse effects of geopolitical tensions and other emerging threats.

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