Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy

Abstract

We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns of 54 sectors in 26 countries. We first present a conceptual framework based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We then use the SAR model to decompose the overall impact of U.S. monetary policy on stock returns into a direct and a network effect. We find that up to 80% of the total impact of U.S. monetary policy shocks on average country-sector stock returns are due to the network effect 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 controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to changes in variable definitions and empirical specifications.

The evolving international effects of China's government spending

“…This could possibly be due to the nonlinear propagation effect caused by China's rapid escalation centrality in the global value chain, which could be studied in an empirical framework involving international production network (e.g. di Giovanni & Hale, 2021). The VIX responds significantly to China's government spending, although the counterfactual analysis suggests that its effect on the international propagation of China's government spending is limited.…”

Monetary Policy Shocks and Input–Output Characteristics of Production Networks

“…An extension of this work was conducted in Di Giovanni and Hales (2022), who studied the impact of monetary policy shocks on the returns at sectoral levels in different countries. They used a spatial structural autoregression model where the global production linkages gave the matrix of weights.…”

Information Shocks in the U.S. and Asset Mispricing in Emerging Economies

“…For instance, using stock price data for individual firms with data from the benchmark input-output tables of the U.S. Ozdagli and Weber (2017) show that shocks might propagate through the production network. Similarly, di Giovanni and Hale (2022) 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. This paper aims to enrich the expanding research on monetary policy spillovers, with a specific focus on their implications for asset prices in emerging market economies.…”