Working Paper: NBER ID: w28827
Authors: Julian Di Giovanni; Galina Hale
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: Monetary Policy; Global Production Networks; Stock Market Spillovers
JEL Codes: F10; F36; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| eliminating global production linkages (F12) | halve the total global impact of US monetary policy shocks (F69) |
| US monetary policy shocks (E39) | global stock returns (G12) |
| US monetary policy shocks (E39) | network effect of global production linkages (F60) |
| network effect of global production linkages (F60) | global stock returns (G12) |
| US monetary policy shocks (E39) | foreign stock returns (G15) |
| customer-supplier linkages (L14) | response of foreign stock returns to US monetary policy shocks (F31) |
| correlates of the global financial cycle and foreign monetary policy shocks (F30) | confounding results (C90) |