Stock Market Spillovers Via the Global Production Network: Transmission of U.S. Monetary Policy

52 Pages Posted: 3 Nov 2020 Last revised: 4 Feb 2022

See all articles by Julian di Giovanni

Julian di Giovanni

Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR)

Galina Hale

University of California, Santa Cruz

Multiple version iconThere are 2 versions of this paper

Date Written: October 2020

Abstract

We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns across countries and sectors using a newly constructed dataset. Our estimation strategy is based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We use the SAR model to decompose the overall impact of U.S. monetary policy on global stock returns into a direct and a network effect. We find that nearly 70% of the total impact of U.S. monetary policy shocks on country-sector stock returns are due to the network effect of global production linkages. Empirical counterfactuals show that shutting down global production linkages would reduce the total global impact of U.S. monetary policy shocks by half. Our results are robust to changes in the definitions of stock returns and monetary policy shocks, to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to alternative empirical specifications.

Keywords: asset prices, global production network, monetary policy shocks, Spillovers

JEL Classification: F10, F36, G15

Suggested Citation

di Giovanni, Julian and Hale, Galina, Stock Market Spillovers Via the Global Production Network: Transmission of U.S. Monetary Policy (October 2020). CEPR Discussion Paper No. DP15404, Available at SSRN: https://ssrn.com/abstract=3723596

Julian Di Giovanni (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States

HOME PAGE: http://julian.digiovanni.ca

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://julian.digiovanni.ca

Galina Hale

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

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