Firm-Level Uncertainty and the Transmission of Monetary Policy
30 Pages Posted: 28 Oct 2022
Date Written: October 22, 2022
We show that firms which face higher uncertainty adjust their investment less in response to monetary policy shocks. We find corroborating evidence of this differential effect from firm-level stock returns on FOMC announcement days. Our results are explained by a real options or “wait-and-see” channel whereby higher uncertainty dampens the response to changes in business conditions. Consistent with this mechanism the dampening effect is stronger for firms that face higher reversibility costs of investment.
Keywords: Monetary policy transmission, firm level uncertainty
JEL Classification: E52, E44, E43, E58
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