Firm-Level Uncertainty and the Transmission of Monetary Policy

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