Monetary Policy through Production Networks: Evidence from the Stock Market

Abstract

We study the importance of production networks for the transmission of macroeconomic shocks using the stock market reaction to monetary policy shocks as laboratory. We decompose the overall effect into direct and network effects and attribute 55 to 85 percent to network effects. Large network effects are a robust feature of the data, and we document similar patterns in realized fundamentals. A simple model with intermediate inputs predicts the reaction of stock returns to shocks follows a spatial autoregression, which we exploit for our empirical strategy. Our results suggest that production networks are an important mechanism for transmitting aggregate shocks.

Keywords: Input-Output linkages, Spillover effects, Asset prices, High frequency identification

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