The Fed Information Effect and Firm-Level Investment: Evidence and Theory

Alex Hsu (), Indrajit Mitra, Yu Xu and Linghang Zeng
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Alex Hsu: https://www.scheller.gatech.edu/directory/faculty/hsu/index.html

No 2023-6a, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to explain these patterns. Our model rationalizes the slow decline in inflation in 2022–23 despite aggressive policy rate hikes.

Keywords: monetary policy; Fed information effect; heterogeneous investment response (search for similar items in EconPapers)
JEL-codes: E22 E52 G31 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2023-06-20, Revised 2024-03
New Economics Papers: this item is included in nep-cba, nep-cfn and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:97979

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DOI: 10.29338/wp2023-06a

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