Working Paper: NBER ID: w23424
Authors: Ali Ozdagli; Michael Weber
Abstract: Monetary policy shocks have a large impact on stock returns in narrow windows around press releases by the Federal Reserve. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct effect and an indirect (network) effect. We attribute 50%-85% of the overall effect to indirect effects. The decomposition is a robust feature of the data and we confirm large indirect effects in realized cash-flow fundamentals. A simple model with intermediate inputs guides our empirical strategy. Our findings indicate that production networks might be an important propagation mechanism of monetary policy to the real economy.
Keywords: Monetary Policy; Production Networks; Stock Market; Spatial Autoregressions
JEL Codes: E12; E31; E44; E52; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Stock returns (G12) |
| Expansionary monetary policy shocks (E39) | Demand for goods of firms (D21) |
| Demand for goods of firms (D21) | Purchases of intermediate goods (L60) |
| Purchases of intermediate goods (L60) | Further demand upstream in the production network (R22) |
| Monetary policy shocks (E39) | Indirect network effects on Stock returns (D85) |
| Higher average profitability (L25) | Lower sensitivities to monetary policy shocks (E49) |