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Local policy uncertainty and the firm's investment reaction to monetary policy

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  • Adra, Samer
  • Gao, Yang
  • Yuan, Jiayi

Abstract

Rising local economic policy uncertainty increases the firm's capital investment sensitivity to monetary shocks. This effect is driven by the tendency of uncertainty-driven precautionary behavior to increase the firm's propensity to reduce investment in response to contractionary monetary shocks. This effect is more pronounced for geographically bound firms that are financially constrained. Our results show how the investment effects of local economic policy uncertainty are entangled with the asymmetries that govern the economic impact of monetary policy.

Suggested Citation

  • Adra, Samer & Gao, Yang & Yuan, Jiayi, 2024. "Local policy uncertainty and the firm's investment reaction to monetary policy," Economics Letters, Elsevier, vol. 234(C).
    • Handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523004998
    DOI: 10.1016/j.econlet.2023.111473
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    References listed on IDEAS

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    1. Bu, Chunya & Rogers, John & Wu, Wenbin, 2021. "A unified measure of Fed monetary policy shocks," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 331-349.
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    4. Pablo Ottonello & Thomas Winberry, 2020. "Financial Heterogeneity and the Investment Channel of Monetary Policy," Econometrica, Econometric Society, vol. 88(6), pages 2473-2502, November.
    5. Saiying (Esther) Deng & Elyas Elyasiani, 2008. "Geographic Diversification, Bank Holding Company Value, and Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1217-1238, September.
    6. James Peery Cover, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1261-1282.
    7. repec:bla:jecsur:v:18:y:2004:i::p:409-426 is not listed on IDEAS
    8. Anna Florio, 2004. "The Asymmetric Effects of Monetary Policy," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 409-426, July.
    9. Selale Tuzel, 2010. "Corporate Real Estate Holdings and the Cross-Section of Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2268-2302, June.
    10. Huseyin Gulen & Mihai Ion, 2016. "Editor's Choice Policy Uncertainty and Corporate Investment," The Review of Financial Studies, Society for Financial Studies, vol. 29(3), pages 523-564.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Cheng, Shulei & Chen, Yongtao & Wang, Kexin & Jia, Lijun, 2024. "Climate policy uncertainty influences carbon emissions in the semiconductor industry," International Journal of Production Economics, Elsevier, vol. 278(C).

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    More about this item

    Keywords

    Monetary policy; Capital investments; Local economic policy uncertainty;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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