Monetary Policy Through Production Networks: Evidence from the Stock Market
65 Pages Posted: 3 Jan 2018 Last revised: 6 Jan 2018
Date Written: 2017-10-01
Monetary policy shocks have a large impact on stock prices during narrow time windows centered around press releases by the FOMC. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct effect and a network effect. We attribute 50 to 85 percent of the overall impact to network effects. The decomposition is a robust feature of the data, and we confirm large network effects in realized cash-flow fundamentals. A simple model with intermediate inputs allows a structural interpretation of our empirical strategy. Our findings indicate that production networks might be an important mechanism for transmitting monetary policy 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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