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Monetary Policy through Production Networks: Evidence from the Stock Market

Ali K. Ozdagli¹; Michael Weber²

¹ Federal Reserve Bank of Dallas · ² Daniels School of Business, Purdue University , and NBER

Abstract We study the importance of production networks for the transmission of monetary policy using the stock market reaction as laboratory. We attribute 55% to 85% of the overall response to network effects. Large network effects are a robust feature of the data; we document similar patterns in realized fundamentals. Matching sparsity and the first two outdegrees industry-by-industry can explain large network effects. A simple model with intermediate inputs predicts the reaction of stock returns follows a spatial autoregression, which we exploit for our empirical strategy. Our results suggest production networks are an important mechanism for transmitting monetary policy shocks.

DOI

10.1093/rfs/hhaf106

Volume

39 (5)

Pages

1411-1462

Language

en

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