Monetary Policy through Production Networks: Evidence from the Stock Market

85 Pages Posted: 20 Nov 2017 Last revised: 10 Nov 2023

See all articles by Ali K. Ozdagli

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Dallas

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 6 versions of this paper

Date Written: October 6, 2023

Abstract

We study the importance of production networks for the transmission of macroeconomic shocks using the stock market reaction to monetary policy shocks as laboratory. We decompose the overall effect into direct and network effects and attribute 55 to 85 percent to network effects. Large network effects are a robust feature of the data, and we document similar patterns in realized fundamentals. A simple model with intermediate inputs predicts 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.

Keywords: Input-Output linkages, Spillover effects, Asset prices, High frequency identification

JEL Classification: E12, E31, E44, E52, G12, G14

Suggested Citation

Ozdagli, Ali K. and Weber, Michael, Monetary Policy through Production Networks: Evidence from the Stock Market (October 6, 2023). Fama-Miller Working Paper , Chicago Booth Research Paper No. 17-31, Available at SSRN: https://ssrn.com/abstract=3073167 or http://dx.doi.org/10.2139/ssrn.3073167

Ali K. Ozdagli

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

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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