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

Luis P. de la Horra, Javier Perote and Gabriel de la Fuente

International Review of Economics & Finance, 2021, vol. 75, issue C, 609-624

Abstract: 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 low-innovation 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.

Keywords: Real options; Investment decisions; Interest rates; Central banks; Risk; Panel VAR (search for similar items in EconPapers)
JEL-codes: C23 D80 E22 E52 E58 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:75:y:2021:i:c:p:609-624

DOI: 10.1016/j.iref.2021.04.035

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