Spillover Effects On Global Financial Markets With The Fed Implementing Tight Monetary Policy

On 17 December 2015, the FOMC, FFR-setting board of the Federal Reserve, had made a decision to raise the federal funds rate by 25 basis points, increasing the FFR from 0-0.25 to 0.25-0.5 per cent. That is, QE (Quantitative Easing)---an unconventional monetary policy Implemented during 2008 international financial crisis had been changed into tight monetary policy through regulation of interest rates and started a new round of raising FFR. Capital always chases profits. In view of the US dollars playing a role as an international currency of settlement for a long time and the Interest Rates Parity theory, although the raising range is not significant, interest rates growth must be attracting the international capitals to flow into the US. To a large extent, the shrink of the supply of the US dollars all over the world can exert a great impact on global financial markets.In the past decades, before and after the FFR hiked cycle, there were always bubbles bursting. Examples are as follows:the Latin American debt crisis in 1982, the Japanese real estate bubble burst during the 1990s, the Asian financial turmoil in 1997, the American Internet bubble burst in 2000 and the international financial crisis in 2008. Recently, the Fed implemented tight monetary policy by raising FFR once agian and how will global financial markets react? Compared with the FFR hiked cycle during 2003-2007, are there any differences?With the purpose of studying the spillover effects on developed countries and emerging economies with the Fed implementing tight monetary policy by raising FFR and making a comparison between 2003-2007 and 2014-2016, this dissertation adopted the statistic data from financial markets of ten typical developed countries and ten important emerging economies. Panel Vector Autoregression model will be employed as a methodology in this article. The conclusions of this research have been drawn as follows:firstly, the tight monetary policy implemented by the Fed does have spillover effects on global financial markets. Secondly, before and after international financial crisis(2003-2007&2014-2016), the Fed’s tight monetary policy by raising FFR has different spillover effects on global financial markets in two diffrent ages. The spillover effects of tight monetary policy implemented by the Fed duiring 2003-2007 on global financial markets are positive, but the spillover effects of tight monetary policy implemented by the Fed during 2014-2016 on global financial markets are negative. Thirdly, the Fed’s tight monetary policy by raising FFR has continuous effects on global financial markets. Fourthly, compared with developed counties, the reacts to the Fed inplementing tight monetary policy of emerging economies’financial markets are more sensitive and the volatilities are fiercer. Fifth, compared with the FFR hiked cycle during 2003-2007, FFR has greater contributions and stronger explanations to the changes of global financial markets during 2014-2016.