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. monetarypolicy 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 thatdelivers a spillover pattern consistent with a spatial autoregression (SAR) process. We use theSAR model to decompose the overall impact of U.S. monetary policy on global stock returnsinto a direct and a network effect. We find that nearly 70% of the total impact of U.S. monetarypolicy shocks on country-sector stock returns are due to the network effect of global productionlinkages. Empirical counterfactuals show that shutting down global production linkages wouldreduce the total global impact of U.S. monetary policy shocks by half. Our results are robust tochanges in the definitions of stock returns and monetary policy shocks, to controlling for correlatesof the global financial cycle, foreign monetary policy shocks, and to alternative empiricalspecifications