Global Monetary Policy Coordination and the Spillover Effects of Federal Reserve Decisions on Exchange Rate and Interest Rate Dynamics

Abstract

This study investigates the reflections of Federal Reserve (FED) monetary policy decisions on global exchange rate and interest rate markets within the framework of international monetary policy coordination. In an increasingly financially integrated world, policy actions undertaken by the FED extend beyond domestic economic stabilization objectives and generate significant spillover effects across advanced and emerging economies. The research aims to analyze how changes in the FED’s policy stance particularly interest rate adjustments and forward guidance signals affect exchange rate volatility, sovereign bond yields, and cross-border capital flows.

Using a quantitative methodology, the study employs a Structural Vector Autoregression (SVAR) model and panel data analysis covering selected developed and developing economies over the period 2005–2024. The empirical framework evaluates both short-term shock transmission and long-term dynamic interactions between U.S. monetary policy indicators and global financial variables. Additionally, impulse-response functions and variance decomposition analyses are conducted to measure the magnitude and persistence of policy spillovers.

The findings reveal that contractionary FED decisions significantly increase global bond yields and trigger depreciation pressures in emerging market currencies. Moreover, the results indicate asymmetric transmission effects, with financially fragile economies exhibiting higher sensitivity to U.S. policy shocks. Evidence also suggests partial policy synchronization among major central banks, particularly during periods of global financial stress.

The study contributes to the literature by integrating monetary policy coordination theory with empirical spillover analysis, highlighting the systemic role of the FED in shaping global financial conditions. The results underscore the importance of macroprudential preparedness and coordinated policy responses in mitigating external vulnerability risks.