Sectoral Volatility and the Investment Channel of Monetary Policy

28 Pages Posted: 17 Jan 2022 Last revised: 15 Mar 2022

See all articles by Ozgen Ozturk

Ozgen Ozturk

European University Institute

Thomas Walsh

European University Institute

Date Written: January 15, 2022


How does the dispersion of firm-level shocks affect the investment channel of monetary policy? Using firm-level panel data, we construct several measures of dispersion of productivity shocks, time-pooled and time-varying, and interact high-frequency identified monetary policy shocks with these measures of idiosyncratic shock volatility. We document a novel fact: monetary policy has dampened real effects via the investment channel when firm-level TFP shock volatility is high. Our estimates for dampening effects of volatility are statistically and economically significant - moving from the tenth to the ninetieth percentile of the volatility distribution approximately halves point estimates of impulse response functions to contractionary monetary policy shocks. Given that dispersion rises in recessions, these findings offer further evidence as to why monetary policy is weaker in recessions, and emphasize the importance of firm heterogeneity in monetary policy transmission.

Keywords: Firm Risk, Second Moment, Idiosyncratic Shocks

JEL Classification: E52, E22, D81

Suggested Citation

Ozturk, Ozgen and Walsh, Thomas, Sectoral Volatility and the Investment Channel of Monetary Policy (January 15, 2022). Available at SSRN: or

Ozgen Ozturk

European University Institute

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Firenze (Florence), 50014

Thomas Walsh (Contact Author)

European University Institute ( email )

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