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Monetary Policy Through Production Networks: Evidence from the Stock Market

Author

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  • Michael Weber

    (University of Chicago)

  • Ali Ozdagli

    (Federal Reserve Bank of Boston)

Abstract

Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. A one percentage point higher than expected Federal Funds rate leads to a drop in the stock market by 4 percentage points within a 30 minutes event window. We decompose the overall event into a direct (demand) effect and an indirect (network) effect using spatial autoregressions. We use the empirical input-output structure from the Bureau of Economic Analysis to construct a spatial-weighting matrix. We attribute 50% to 85% of the overall effect to indirect effects. The effect is robust to different sample periods, event windows, type of announcements, and is symmetric in the shock sign. We rationalize our findings in a simple model with intermediate inputs. Our findings indicate that production networks might not only be important for the propagation of idiosyncratic shocks but might also be a propagation mechanism of monetary policy to the real economy.

Suggested Citation

  • Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:148
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    References listed on IDEAS

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    Cited by:

    1. Eksi, Ozan & Tas, Bedri Kamil Onur, 2017. "Unconventional monetary policy and the stock market’s reaction to Federal Reserve policy actions," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 136-147.
    2. Ernesto Pasten & Raphael Schoenle & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," NBER Working Papers 23750, National Bureau of Economic Research, Inc.
    3. Andreas Neuhierl & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo Group Munich.
    4. Pierre Guérin & Danilo Leiva-Leon, 2017. "Monetary policy, stock market and sectoral comovement," Working Papers 1731, Banco de España;Working Papers Homepage.
    5. Michael Weber & Andreas Neuhierl, 2016. "Monetary Policy and the Stock Market: Time-Series Evidence," Working Papers 2016-26, Becker Friedman Institute for Research In Economics.
    6. Billio, Monica & Caporin, Massimiliano & Panzica, Roberto Calogero & Pelizzon, Loriana, 2017. "The impact of network connectivity on factor exposures, asset pricing and portfolio diversification," SAFE Working Paper Series 166, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    7. repec:irv:wpaper:171806 is not listed on IDEAS
    8. Arikan, Cengiz & Yalcin, Yeliz, 2017. "Do The Countries’ Monetary Policies Have Spatial Impact?," MPRA Paper 83407, University Library of Munich, Germany.
    9. Lu, Lina, 2017. "Simultaneous Spatial Panel Data Models with Common Shocks," Risk and Policy Analysis Unit Working Paper RPA 17-3, Federal Reserve Bank of Boston.
    10. Bonaccolto, Giovanni & Caporin, Massimiliano & Panzica, Roberto Calogero, 2017. "Estimation and model-based combination of causality networks," SAFE Working Paper Series 165, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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