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Inflation, interest rate, and firm efficiency: The impact of policy uncertainty

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  • Tarkom, Augustine
  • Ujah, Nacasius U.

Abstract

This study investigates the effect of inflation and interest rate on firm efficiency while exploring the role of policy uncertainty. Not a misnomer, macroeconomic conditions matter, and their impact on business strategy are inherently observed directly or indirectly. Yet, there is still a shortage of literature relating inflation and interest rate through the moderating effect of policy uncertainty on firm efficiency. With 92,293 observations from 12,207 US firms, we find that inflation positively affects firm efficiency, and interest rate negatively affects firms’ efficiency. Similarly, the moderating effect of policy uncertainty amplifies the significance of inflation and interest rate. Further examination of the moderating impact finds a positive directionality for both macroeconomic conditions for larger firms, firms that pay dividends, firms with a higher cost of goods and services and higher sales, and firms located in the Midwest region. The results are robust to firm-year fixed effects and clustering approaches.

Suggested Citation

  • Tarkom, Augustine & Ujah, Nacasius U., 2023. "Inflation, interest rate, and firm efficiency: The impact of policy uncertainty," Journal of International Money and Finance, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622002029
    DOI: 10.1016/j.jimonfin.2022.102799
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    1. Tarkom, Augustine & Ujah, Nacasius U., 2023. "Global policy uncertainty and working capital management: Does national culture matter?," Technological Forecasting and Social Change, Elsevier, vol. 196(C).

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    More about this item

    Keywords

    Inflation; Interest Rate; Policy Uncertainty; Firm Efficiency; Consumer Price Index;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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