Network Effects of Monetary Policy: Evidence from Global Value Chains

79 Pages Posted: 26 Jun 2018

Date Written: June 19, 2018


The paper investigates whether production networks are an important channel for the propagation of monetary policy shocks to the stock market in the Euro-area. To do so, it exploits a new comprehensive dataset on a time-series of input-output connections between European country-industries matched with sector-level stock market data. This dataset allows me to distinguish the distribution of the output of industries over 473 user categories (418 intermediate industries and 55 final customers) across 11 Eurozone countries. Monetary policy shocks are identified along two dimensions: one related to the current level of short-term rates (target) and a second related to expectations about the future path of monetary policy (path). First, using an event-study approach around ECB Monetary Policy Announcement dates and novel tools from spatial econometrics, this is the first paper to show that between 40% and 50% of the overall European stock market reaction is due to higher-order network effects. Second, the paper investigates the link between the network structure and the transmission of monetary policy. Industries located in the periphery of the production network react the most to policy shocks, whereas central industries are most influential and serve as an amplification mechanism for the propagation of shocks. Finally, the paper considers the effect of network connections outside of the Euro-area and finds that the response to monetary policy shocks is considerably mitigated for industries located centrally in the global production network.

Keywords: input-output connections, monetary policy, network spillovers, spatial econometrics

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

Suggested Citation

Todorova, Zornitsa, Network Effects of Monetary Policy: Evidence from Global Value Chains (June 19, 2018). Available at SSRN: or

Zornitsa Todorova (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136

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