Firm Heterogeneity and the Response of Investment to Monetary Policy
It is well known that monetary policy affects firms’ investment decisions. But which firms are the most responsive to changes in interest rates? And does this responsiveness vary over time? The literature has given diverse answers to this question, focusing on characteristics such as firm size, age, and financial position, and mostly studying these traits in isolation. In this post based on a…
Thomas Drechsel, Daniel Lewis, Davide Melcangi, and Laura Pilossoph investigate how investment by firms responds to changes in monetary policy. They find that most firms experience little change in investment following monetary policy shifts, but a small percentage of firms exhibit strong sensitivity to interest rate fluctuations. This study emphasizes the importance of considering the full range of investment responses rather than solely focusing on average effects.
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