Does U.S. Monetary Policy Affect the Connectedness of Global Financial Markets?

As global financial integration deepens, shocks from a local market can generate global spillover effects more easily. Historical episodes, such as the 2008 financial crisis and the COVID-19 pandemic show that the connectedness of financial markets is closely related to global systemic risks. This paper examines how U.S. monetary policy affects global financial markets' connectedness. Based on data from 48 advanced and emerging markets data, we constructed a measure of global financial market connectedness from 2002 to 2021. By dividing the Fed policy announcement data into monetary policy and information shocks, we find that both shocks strengthen the connectedness of the global financial market, especially when the Fed cuts the interest rate. In response to the two types of shocks, advanced countries generally create substantial outward spillovers, whereas emerging market economies are likely to receive inward effects. Finally, we find evidence that other factors, such as global crises, local market sentiments, and interest rate changes, also affect the interconnectedness of global financial markets.