The effects of The US Central Bank FED's monetary policy decisions on the financial markets of the emerging country

With globalization, no country's economy in the world, whether developed or developing, is independent from the other. For this reason, countries have to follow the economies of other countries closely while following the performances of their own economies. In this context, US economy is undoubtedly more important than any other world economy. The purpose of this study is, on the one hand, to reveal the history and structure of the FED and economic data it takes into account while making decisions, and on the other hand, to analyze the effects of the FED's monetary policy decisions on the financial markets of developing countries with econometric methods. The size of the US economy and its financial markets, the fact that the US Dollar is the most important reserve currency in the world, and that the FED has the right to print Dollars results in close monitoring of the FED's decisions and policy implementations all over the world. It is beneficial for all countries to closely monitor the policy decisions of the FED which guides both the US and the world economy especially with the expansionary monetary policies implemented during the 2008 global economic crisis and the 2020 Covid-19 pandemic, and the contractionary monetary policies implemented in 2014-2019 period. In particular, developing countries with high external debt stock, high current account deficit and high dependency on imports in production and consumption such as Turkey, can be significantly affected by the FED's decisions. For this reason, it is beneficial to frequently analyze the effects of the FED's monetary policy decisions on the economies of developing countries and to take necessary measures urgently in problematic areas. In this context; the effects of FED's interest rate increases (FED's implementation of the contractionary monetary policy) and FED's monetary base expansions (FED's implementation of expansionary monetary policy) on the stock market indexes, exchange rates and interest rates of 20 countries that are classified as developing countries according to MSCI index and whose data are available, were analyzed using panel data analysis methods. The stationarity of the series were examined with LLC and IPS panel unit root tests and it was found that all the series are stationary at the first difference. Whether the interest rates of these developing countries converge to the interest rate of the leading country, the USA (FED), was also analyzed by LLC and IPS methods, and it was determined that the interest rates of developing countries converge to the interest rate of the FED. Existence of cointegration relationship between the series in the models was examined with Kao (1999) panel cointegration test and the series were found to be cointegrated. The long and short term analyses between these series which have cointegration relationship, were carried out by Panel DOLS method. In the long term analysis, it was determined that in general, the increase of the interest rate by the FED affects the stock market indexes and exchange rates of these developing countries negatively and the interest rates positively, while the increase of the monetary base by the FED affects the stock market indexes and exchange rates of these countries positively and the interest rates negatively. It was found that the effects of the increase in interest rate and monetary base by the FED on the interest rates of the developing countries in the Americas are statistically insignificant. In this analysis, the results of exchange rates are not compatible with our a priori expectations. In this case, it is evaluated that the exchange rates in developing countries are shaped according to the risks and macroeconomic situations of the countries rather than the FED's decisions. The results of the short term analysis are generally consistent with the results of the long term analysis, and it was determined that the error correction mechanisms of all models operate, that is, the analyses conducted are reliable. Looking at the differences between long term and short term analyses, it was observed that in response to the FED's interest rate increases, in the developing countries located in the American and Asian continents, the stock market indexes increase in the short term and decrease in the long term. For this reason, it is beneficial for investors who will trade in the stock markets of developing countries in the Americas and Asia to consider these different effects of the FED's interest rate decisions. In response to the FED's expansion in the monetary base, it was determined that the stock market indexes decrease in all country groups in the short term, but increase in the long term. According to this result, it would be beneficial for investors, who will trade in the stock exchanges of 20 developing countries included in the analysis, to consider that the short and long term effects of the monetary expansion policies to be implemented by the FED may differ. Causality relationships between the series were examined with Dumitrescu and Hurlin (2012) panel causality test and it was determined that there are causality relationships from the FED interest rate to the interest rates in developing countries, and from the monetary base of the FED to the stock market indexes and interest rates in developing countries. When the country basket is narrowed or analyzed on the basis of continents, although partial changes are observed, the results are generally similar. In these analyses, it was noteworthy that the interest rates of the countries in the American continent are not affected by the interest rate of the FED. It was revealed that the most sensitive countries to the FED's interest rate and monetary base practices are the countries in the Asian continent. Based on the findings obtained from this study, it can be stated that the FED is a role model central bank for developing countries, but exchange rates and stock market indexes are determined by country-specific dynamics. For this reason, it can also be stated that developing country central banks can follow the decisions of the FED in terms of interest rates and monetary base practices, but they need to develop their own domestic monetary policies in order to ensure price stability and financial stability, especially stability in exchange rates.