Comovement of Global Stock Market: The Role of Production and Fund Flow Networks in the Propagation of U.S. Monetary Policy

Globalization has intensified trade and financial connections between countries, causingcountry-level economic shocks, such as changes in U.S. monetary policy, to havesignificant global effects. Research has identified the global production network as animportant channel for transmitting the U.S. monetary policy shocks on world stockmarkets. However, to our best knowledge, the question of how monetary policy shockspropagate through the financial network to influence global stock markets remains to bestudied.To fill in this gap, this project proposes to incorporate the international fund flownetwork into the global production network model of di Giovanni and Hale (2022). Weaim to examine the impact of U.S. monetary policy shocks on the global stock marketthrough both production and fund flow networks. An interconnected internationalproduction network can amplify the effects of a U.S. monetary policy shock on the globaleconomy, leading to fluctuations in stock returns across countries. Similarly, anintegrated international fund flow network can trigger cross-border fund movements,altering households' access to funds and influencing final demand and stock market ineach nation. Furthermore, the interaction between these networks is complex, potentiallyresulting in either the amplification or mitigation of the monetary policy shock,depending on the specific characteristics of each network.Based on our extended theoretical framework, we propose to derive and estimate astructural spatial autoregression model. This model will enable us to empiricallydecompose the overall impact of U.S. monetary policy on stock markets into effects ofglobal production network, international fund flow network, and the interaction of thetwo networks. Therefore, we can quantify the relative importance of each channel intransmitting the U.S. monetary policy shocks to global stock markets.The results of this project will provide valuable insights for the Hong Kong governmentand financial industry, helping them effectively formulate investment and productionstrategies, attract foreign capital, and enhance Hong Kong's status as an internationalfinancial center. Moreover, our findings also have implications for the broaderinternational financial system, contributing to a better understanding of the complexinteractions between monetary policy, global production network, financial network, andfinancial markets.