International Transmission Effects of Federal Reserve (FED) Policy Shocks on Interest Rate and Exchange Rate Dynamics

Abstract

This study investigates the international transmission effects of Federal Reserve (FED) monetary policy shocks on global interest rate and exchange rate dynamics within an increasingly integrated financial system. In a context characterized by high capital mobility and deep cross-border financial linkages, policy decisions taken by the FED extend beyond domestic stabilization objectives and exert systemic influence on global financial markets. The primary objective of this research is to examine the magnitude, persistence, and asymmetry of these spillover effects across advanced and emerging economies.

Employing a quantitative empirical framework, the study utilizes a Structural Vector Autoregression (SVAR) model to identify exogenous U.S. monetary policy shocks and trace their dynamic impact on sovereign bond yields and bilateral exchange rates. In addition, a panel data regression analysis is conducted to assess cross-country heterogeneity and to determine whether emerging market economies exhibit greater sensitivity to FED policy shifts. The dataset covers the period 2005–2024, incorporating episodes of unconventional monetary expansion and subsequent tightening cycles.

The findings reveal that contractionary FED policy shocks generate statistically significant increases in international long-term interest rates and induce depreciation pressures in emerging market currencies. The transmission effects are stronger and more persistent in economies with higher external financing dependence and greater exposure to global capital flows. Moreover, periods of heightened global risk amplify the spillover intensity, suggesting a nonlinear interaction between monetary policy shocks and financial market sentiment.

The results underscore the structural role of the FED within the global financial architecture and highlight the limitations of monetary policy autonomy under conditions of financial globalization. These findings contribute to the literature on international monetary transmission and global financial stability.