U.S. monetary policy and portfolio spillover effects: The role of global production network

Abstract

This paper evaluates the impact of global production linkages on the transmission of U.S. monetary policy shocks to capital flows across countries (e.g., portfolio flows). The spatial autoregression (SAR) model is applied to separate the total influence of U.S. monetary policy into two distinct components: a direct effect and a network effect. The empirical results show that around 70 % of the total impact of U.S. monetary policy shocks on capital flows can be attributed to the network effect of global production network. Moreover, we prove that stock market returns play a significant role in the underlying mechanism. The coordination of the monetary policies between target countries and the United States could reduce the network effects. The additional analysis reveals that countries with larger size, more reliance on dollar invoicing, greater financial openness and higher levels of financial development are more susceptible to the network impact of U.S. monetary shocks.