Monetary Policy Through Production Networks: Evidence from the Stock Market

69 Pages Posted: 19 Jun 2017

See all articles by Ali K. Ozdagli

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 6 versions of this paper

Date Written: May 30, 2017

Abstract

Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect (network) effect. We attribute 50%-85% of the overall effect to indirect effects. The decomposition is robust to different sample periods, event windows, and types of announcements. Direct effects are larger for industries selling most of the industry output to end-consumers compared to other industries. We find similar evidence of large indirect effects using ex-post realized cash-flow fundamentals. A simple model with intermediate inputs guides our empirical methodology. Our findings indicate that production networks might be an important propagation mechanism of monetary policy to the real economy.

Keywords: input-output linkages, spillover effects, asset prices, high frequency identification

JEL Classification: E120, E310, E440, E520, G120, G140

Suggested Citation

Ozdagli, Ali K. and Weber, Michael, Monetary Policy Through Production Networks: Evidence from the Stock Market (May 30, 2017). CESifo Working Paper Series No. 6486. Available at SSRN: https://ssrn.com/abstract=2988894

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

HOME PAGE: http://sites.google.com/site/ozdagli/

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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