Abstract
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 consistent with 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.
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