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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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    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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