Julian di Giovanni, New York Federal Reserve Bank

"Stock Market Spillovers via the Global Production Network:  Transmission of U.S. Monetary Policy" (w/Galina Hale)

Abstract: We quantify the role of global production linkages in explaining spillovers of the U.S. monetary policy shocks to stock returns of 54 sectors in 26 countries. A simple open-economy production network model predicts a spillover pattern consistent with a spatial autoregression framework, which allows us to decompose the overall impact of U.S. monetary policy on stock returns into a direct and a network effect. We fnd that approximately 60% of the total impact of U.S. monetary policy shocks on average country-sector stock returns are due to the network efect of global production linkages. We further show that U.S. monetary policy shocks have a direct impact predominantly on U.S. sectors and then propagate to the rest of the world through the global production network. Our results are robust to extending our sample to 2000–16 and to controlling for other correlates of the global financial cycle.