Research On The Spillover Effects Of The Fed’s Monetary Policy On The Financial Markets Of Emerging Market Countries

The spillover effects of monetary policy are an important subject of research in macroeconomics.During the 2008 financial crisis and the global spread of the COVID-19 pandemic in 2020,developed countries in Europe and America implemented unconventional monetary policies on a large scale.This prompted extensive research on their spillover effects,expanding upon the traditional understanding of monetary policy spillovers.As the world’s largest economy,the United States had a significant impact on the global economy,particularly on emerging market countries,through its monetary policy.Financial markets,known for their sensitivity to monetary policy,also demonstrated noticeable reactions to these policies.Therefore,researching the spillover effects of the Fed’s monetary policy on the financial markets of emerging market countries during these two crisis periods can contribute to a deeper understanding of the spillover effects of monetary policy under different contexts and national characteristics.This research employs a factor model to analyze the changes in the yields of various maturities of US Treasury bonds during the research period.It extracts two factors,namely a signal factor that affects short-term interest rates and a market factor that influences long-term interest rates.The research utilizes an event study approach and establishes a panel model to empirically examine the impact of the two-factor shocks on the financial markets of emerging market countries.The research findings are as follows:(1)The monetary policy of the Fed exhibits significant spillover effects on the financial markets of emerging market countries.Loose monetary policy increases stock price indices and reduces 10-year bond yields,leading to the appreciation of currency in these countries.(2)By comparing the spillover effects during the 2008 financial crisis and the 2020 COVID-19 pandemic,it is observed that the spillover to the bond markets of emerging market countries was greater during the 2008 financial crisis compared to the 2020 pandemic.However,the spillover to the exchange rate market shows the opposite pattern.The spillover effects on the stock market remain uncertain.Specifically,under a positive shock of 1 unit in the signal factor,during the financial crisis period,bond yield changes are 0.110 standard deviations larger compared to the COVID-19 pandemic period,while exchange rate changes are 0.027 standard deviations smaller.Under a positive shock of 1 unit in the market factor,bond yield changes during the financial crisis period are 0.006 standard deviations larger compared to the COVID-19 pandemic period,while exchange rate changes are 0.531 standard deviations smaller.Furthermore,under a positive shock of 1 unit in the market factor,stock price changes during the financial crisis period are 0.644 standard deviations smaller compared to the COVID-19 pandemic period,while under a positive shock of 1 unit in the signal factor,stock price changes during the financial crisis period are 0.155 standard deviations larger compared to the COVID-19 pandemic period.(3)The magnitude of spillover effects is influenced by macroeconomic fundamentals such as the current account balance,international reserve levels,and external debt levels.The spillover size of the Fed’s monetary policy varies across countries with different macroeconomic fundamentals.Based on the research findings,this thesis proposes the following policy recommendations to better withstand external risk shocks in China:(1)Strengthen policy coordination while maintaining the independence of monetary policy.By enhancing cooperation and coordination with other countries,we can improve our ability to withstand external risk shocks.Simultaneously,establish a macroeconomic policy framework to withstand external shocks through the coordination of different internal policies,while ensuring the independence of monetary policy.(2)Promote a balanced and orderly exchange rate and advance the internationalization process of the renminbi to foster a more stable and sustainable exchange rate system.By implementing macro-prudential and micro-prudential policies,we can effectively manage cross-border capital flows.Through policy adjustments,we aim to achieve a balanced and reasonable exchange rate level.Simultaneously,we will gradually expand the level of internationalization of the renminbi in an orderly manner.(3)Enhance expectation management and rationally guide market expectations.Effective management of market expectations can help mitigate the impact of external risk shocks.By utilizing various channels and means,we can stabilize the expectations of market participants.Strengthening communication with market participants is crucial in establishing a rational and controllable mechanism for expectation management.(4)Strengthen the functionality of the capital market to enhance our capacity to cope with risk shocks.Continue to deepen the structural reform of the financial supply side,improve the infrastructure construction of the financial market,and build a sound capital market system.