LSF Lunch Seminar : Monetary Policy through Production Networks: Evidence from the Stock Market

Monetary Policy through Production Networks: Evidence from the Stock Market

by Ali Ozdagliy and Michael Weber

We study the importance of production networks for the transmission of macroeconomic shocks using the stock market reaction to monetary policy shocks as a laboratory.

We decompose the overall effect of monetary policy shocks into a direct effect and a network effect and attribute 50 to 85 percent of the overall effect to the network effect. Large network effects are a robust feature of the data, and we document similar patterns in realized cash-ow fundamentals. A simple model with intermediate inputs predicts that 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 to the real economy.