Monetary policy and corporate investment: A panel-data analysis of transmission mechanisms in contexts of high uncertainty

This paper investigates the impact of monetary policy on firm-level investment in contexts of economic turmoil. Using a panel of US public firms for the period 2000-2019, we show that policy-rate-based transmission mechanisms are undermined when uncertainty spikes. Furthermore, we find evidence of the existence of asymmetries at the firm level. In line with real options theory's predictions, firms with higher levels of investment irreversibility, operational inflexibility, and market power, as well as firms with lower cash flows and who operate in lowinnovation sectors tend to be less responsive to changes in monetary policy. The effectiveness of monetary policy thus depends on the ability of monetary authorities to reduce uncertainty via expectations-based monetary tools, whilst targeting those sectors more likely to be affected by monetary-policy shifts.

Automated summary

The study shows that uncertainty spikes can undermine the policy-rate-based transmission mechanisms, and asymmetries exist at the firm level where factors such as investment irreversibility, market power, and cash flows influence firms' responsiveness to monetary policy changes. The effectiveness of monetary policy depends on authorities' ability to reduce uncertainty and target sectors more likely to be affected by policy shifts.