Monetary Policy Through Production Networks: Evidence from the Stock Market
66 Pages Posted: 23 Nov 2015 Last revised: 20 Nov 2017
Date Written: November 18, 2017
We study the importance of production networks for the transmission of macroeconomic shocks using the stock market reaction to monetary policy shocks as a laboratory. We decompose the overall effect of monetary policy shocks into a direct effect and a network effect and attribute 50 to 85 percent of the overall effect to the network effect. Large network effects are a robust feature of the data, and we document similar patterns in realized cash-flow fundamentals. A simple model with intermediate inputs predicts that the reaction of stock returns to shocks follows a spatial autoregression, which we exploit for our empirical strategy. Our results suggest that production networks are an important mechanism for transmitting aggregate shocks to the real economy.
Keywords: Input-output linkages, Spillover effects, Asset prices, High frequency identification
JEL Classification: E12, E31, E44, E52, G12, G14
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