The recent era of globalization has witnessed growing cross-country trade integration as firms’ production chains have spread across the world, and with stock market returns becoming more correlated across countries. While research has predominantly focused on how financial integration impacts the propagation of shocks across international financial markets, trade also influences these cross-border spillovers. In particular, one important aspect, highlighted by the recent work of di Giovanni and Hale (2020), is how the global production network influences the transmission of U.S. monetary policy to world stock markets....
Using monthly stock return data at the country-sector level, the estimation finds that the propagation of a U.S. monetary policy shock through the global production network is statistically significant and accounts for most of the total impact.…
The sizeable role of production linkages in transmission of U.S. monetary policy has a number of important implications. First, if international trade in intermediate goods continues to grow and global supply chains become longer and more complex, the impact of U.S. monetary policy on other countries is likely to increase as well. To the extent that this transmission channel is independent of capital flows and related policies, the results present one of the mechanisms by which capital controls may not be effective in insulating economies from foreign monetary policy actions....
Julian di Giovanni | assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group
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