Working Paper: CEPR ID: DP15404
Authors: Galina Hale; Julian Di Giovanni
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: Global production network; Asset prices; Monetary policy shocks; Spillovers
JEL Codes: G15; F10; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| If global production linkages were shut down (F69) | total global impact of US monetary policy shocks (E39) |
| US monetary policy shocks (E39) | global stock returns (G12) |
| US monetary policy shocks (E39) | network effects on global stock returns (F60) |