Propagation of Monetary Policy through Production Networks

81 Pages Posted: 20 Nov 2017 Last revised: 19 Feb 2021

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: February 2021

Abstract

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 55 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

Suggested Citation

Ozdagli, Ali K. and Weber, Michael, Propagation of Monetary Policy through Production Networks (February 2021). 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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