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

We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns across countries and sectors using a newly constructed dataset. Our estimation strategy is based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We use the SAR model to decompose the overall impact of U.S. monetary policy on global stock returns into a direct and a network effect. We 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. Empirical counterfactuals show that shutting down global production linkages would reduce the total global impact of U.S. monetary policy shocks by half. Our results are robust to changes in the definitions of stock returns and monetary policy shocks, to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to alternative empirical specifications. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.