Firm-Level Uncertainty and the Transmission of Forward Guidance to Investment

88 Pages Posted: 28 Sep 2021 Last revised: 27 Oct 2021

See all articles by Niklas Kroner

Niklas Kroner

Board of Governors of the Federal Reserve System

Date Written: September 27, 2021

Abstract

I study the role of firms' uncertainty in the transmission of forward guidance to investment. To do so, I employ a quarterly firm-level panel of U.S. publicly traded firms. I measure forward guidance shocks based on unexpected changes in the slope of the yield curve in a 30-minute window around Federal Reserve announcements. I show that firms which are more uncertain adjust their investment as if they are more pessimistic. More uncertain firms adjust their investment relatively more downward for expected monetary tightenings and relatively less upward for expected loosenings. To explain my empirical findings, I construct a New Keynesian model with a high-uncertainty and a low-uncertainty sector. Agents in the high-uncertainty sector are ambiguous (Knightian uncertain) about the informativeness of forward guidance, and choose to take a pessimistic stance due to their ambiguity aversion. The model implies that expansionary forward guidance is less powerful in recessions due to a larger share of uncertain agents.

Keywords: Monetary policy, forward guidance, uncertainty, investment, ambiguity aversion

JEL Classification: D20, D80, E30, E40, E50

Suggested Citation

Kroner, T. Niklas, Firm-Level Uncertainty and the Transmission of Forward Guidance to Investment (September 27, 2021). Available at SSRN: https://ssrn.com/abstract=3931591 or http://dx.doi.org/10.2139/ssrn.3931591

T. Niklas Kroner (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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