Firm-Level Uncertainty and the Transmission of Monetary Policy

30 Pages Posted: 28 Oct 2022

See all articles by Aeimit Lakdawala

Aeimit Lakdawala

Wake Forest University - Department of Economics

Timothy Moreland

University of North Carolina (UNC) at Greensboro - Department of Economics

Date Written: October 22, 2022

Abstract

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

Suggested Citation

Lakdawala, Aeimit and Moreland, Timothy, Firm-Level Uncertainty and the Transmission of Monetary Policy (October 22, 2022). Available at SSRN: https://ssrn.com/abstract=4255980 or http://dx.doi.org/10.2139/ssrn.4255980

Aeimit Lakdawala (Contact Author)

Wake Forest University - Department of Economics ( email )

Winston Salem, NC
United States

HOME PAGE: http://aeimit.weebly.com

Timothy Moreland

University of North Carolina (UNC) at Greensboro - Department of Economics ( email )

Greensboro, NC 27402-6165
United States

HOME PAGE: http://timothymoreland.com

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