Monetary Policy Through Production Networks: Evidence from the Stock Market
A central endeavor in macroeconomic research seeks to understand how shocks are transmitted throughout the economy. Recent findings suggest that microeconomic shocks—those that affect a single firm, industry, or related group—spread through the larger economy and generate aggregate fluctuations via the production network (the economy’s input-output structure). However, there is little evidence about how much of the overall response to macroeconomic shocks can be attributed to network effects, since these effects are difficult to measure. By treating monetary policy changes as demand shocks, and tracing how stock prices are affected during a narrow time window centered around FOMC policy announcements, the authors quantify how a macroeconomic shock is disseminated throughout the real economy via input-output linkages. They employ spatial autoregressions to decompose the overall monetary shock into a direct effect and a network effect.