A SYSTEMATIC REVIEW OF THE GLOBAL LITERATURE ON ARBITRAGE CHANNELS AND THE FED'S MONETARY TIGHTENING

Abstract

This study examines the transmission mechanisms of the United States Federal Reserve’s monetary policy tightening and its broader implications for global capital movements and arbitrage pathways, employing a systematic literature review (SLR) methodology. The analysis concentrates on the influence of interest rate disparities in driving cross-border capital flows and shaping policy decisions in both developed and developing economies. The findings indicate that periods of Federal Reserve tightening tend to redirect capital towards advanced economies—particularly the United States—while simultaneously triggering capital outflows from emerging markets. These dynamics contribute to diminished global liquidity and depreciation of emerging market currencies. Furthermore, the study explores the spillover repercussions of U.S. monetary actions, highlighting the heightened vulnerability of emerging economies to capital flight and systemic financial instability. It argues that macroprudential tools, including capital flow regulation measures and foreign exchange reserve buffers, are vital for mitigating volatility in these regions. Additionally, the research advocates enhanced international coordination of monetary policies to address cross-border spillovers and reinforce global financial resilience. The paper concludes by calling for further investigation into the effectiveness of regulatory interventions and the extent to which regional policy responses diverge in reaction to shifts in U.S. monetary strategy.