Daniel Lewis (UCL): The Investment Channel of Monetary Policy: Disentangling Firm Heterogeneity
Abstract: To study monetary policy transmission at the firm level, researchers typically consider heterogeneity along a small number of firm characteristics, such as firm size or leverage. We instead estimate the full distribution of firms’ investment responses to changes in monetary policy, using a clustering regression framework. Our new approach can capture multidimensional and unobservable heterogeneity across firms and time. We find that investment by most firms in most time periods responds little to monetary policy. Only about 5% of firm-time observations are associated with a strong response. In those cases, a 25 basis point interest rate hike lowers the quarterly growth rate of firm capital by about 1 percentage point on average. We then correlate our investment sensitivity estimates to observable firm characteristics. While typical characteristics studied in the literature predict sensitivity, we also uncover novel correlates. In general, the responsiveness of investment cannot easily be explained with a small number of typical firm-level observables. We demonstrate that our empirical estimates provide new and critical targets for disciplining structural models of firm heterogeneity and monetary policy.
Economics
Email