IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v234y2024ics0165176523004998.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176523004998
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2023.111473?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:bla:jecsur:v:18:y:2004:i::p:409-426 is not listed on IDEAS
    2. Pablo Ottonello & Thomas Winberry, 2020. "Financial Heterogeneity and the Investment Channel of Monetary Policy," Econometrica, Econometric Society, vol. 88(6), pages 2473-2502, November.
    3. Baker, Scott R. & Davis, Steven J. & Levy, Jeffrey A., 2022. "State-level economic policy uncertainty," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 81-99.
    4. 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.
    5. Anna Florio, 2004. "The Asymmetric Effects of Monetary Policy," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 409-426, July.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    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)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Julian di Giovanni & John Rogers, 2024. "The Impact of U.S. Monetary Policy on Foreign Firms," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 58-115, March.
    2. Wang, Jiamei & Chen, Haibin & Zhang, Heng & Luo, Jianchao & Cheng, Mingwang & Zhang, Jiaping, 2022. "Property rights reform and capital adequacy ratios of rural credit cooperatives in China," Economic Modelling, Elsevier, vol. 106(C).
    3. Pham, Tho & Talavera, Oleksandr & Tsapin, Andriy, 2018. "Shock contagion, asset quality and lending behavior," BOFIT Discussion Papers 21/2018, Bank of Finland Institute for Emerging Economies (BOFIT).
    4. Döttling, Robin & Lam, Adrian, 2023. "Does Monetary Policy Shape the Path to Carbon Neutrality?," OSF Preprints kqdar, Center for Open Science.
    5. Alam, Ahmed W. & Farjana, Ashupta & Houston, Reza, 2023. "State-level economic policy uncertainty (EPU) and firm financial stability: Is there any political insurance?," Economics Letters, Elsevier, vol. 225(C).
    6. Laine, Olli-Matti & Pihlajamaa, Matias, 2023. "Asymmetric effects of conventional and unconventional monetary policy when rates are low," Bank of Finland Research Discussion Papers 3/2023, Bank of Finland.
    7. Xiaonan Li & Chang Song, 2021. "Does the target market affect bank performance? Evidence from the geographic diversification of city commercial banks in China," Frontiers of Business Research in China, Springer, vol. 15(1), pages 1-25, December.
    8. Cardozo, Pamela & Morales-Acevedo, Paola & Murcia, Andrés & Rosado, Alejandra, 2022. "Does the geographical complexity of the Colombian financial conglomerates increase banks’ risk? The role of diversification, regulatory arbitrage, and funding costs," Journal of Banking & Finance, Elsevier, vol. 134(C).
    9. Kuessi, Richard & Nantob, N'Yilimon & Aguey, Segnon & Couchoro, Mawuli Kodjovi, 2023. "Competition and banking efficiency in the WAEMU: The role of multinationals and institutions," International Economics, Elsevier, vol. 175(C), pages 45-62.
    10. Masagus M. Ridhwan & Henri L.F. de Groot & Peter Nijkamp, 2010. "The Impact of Monetary Policy on Economic Activity - Evidence from a Meta-Analysis," Tinbergen Institute Discussion Papers 10-043/3, Tinbergen Institute.
    11. Keil, Jan & Ongena, Steven, 2024. "The demise of branch banking – Technology, consolidation, bank fragility," Journal of Banking & Finance, Elsevier, vol. 158(C).
    12. Benjamin Amoah & Godfred A. Bokpin & Kwaku Ohene‐Asare & A. Q. Q. Aboagye, 2021. "Drivers of income diversification in credit unions: Do size, resource, liquidity, and environment matter?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(6), pages 1407-1420, September.
    13. Song, Jeongseop & Zhang, Fan, 2024. "Regional market uncertainty and corporate investment," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
    14. Theodora Bermpei & Antonios Nikolaos Kalyvas & Leone Leonida, 2021. "Local Public Corruption and Bank Lending Activity in the United States," Journal of Business Ethics, Springer, vol. 171(1), pages 73-98, June.
    15. Bitros, George C., 2021. "Destabilizing asymmetries in central banking: With some enlightenment from money in classical Athens," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    16. Kellner, Tobias, 2024. "The impact of M&A announcements on stock returns in the European Union," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 843-862.
    17. Long, Shaobo & Pei, Hongxia & Tian, Hao & Li, Fangfang, 2021. "Asymmetric impacts of economic policy uncertainty, capital cost, and raw material cost on China’s investment," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 129-144.
    18. Marinelli, Giuseppe & Nobili, Andrea & Palazzo, Francesco, 2022. "The multiple dimensions of bank complexity: Effects on credit risk-taking," Journal of Banking & Finance, Elsevier, vol. 134(C).
    19. Ross Levine & Chen Lin & Wensi Xie, 2021. "Geographic Diversification and Banks’ Funding Costs," Management Science, INFORMS, vol. 67(5), pages 2657-2678, May.
    20. Ryan Banerjee & Boris Hofmann & Aaron Mehrotra, 2022. "Corporate investment and the exchange rate: The financial channel," International Finance, Wiley Blackwell, vol. 25(3), pages 296-312, December.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523004998. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.