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Interest Rate Uncertainty and Firm Decisions

Author

Listed:
  • Duquerroy, Anna
  • Istrefi, Klodiana
  • Mouabbi, Sarah

Abstract

We examine the effects of uncertainty regarding the path of interest rates on firms decisions in the euro area. In the presence of heightened short-term interest rate uncertainty, firms tend to decrease their future investments and hiring activities. They also adopt a more cautious approach by hoarding cash and cutting dividend payments. Firm heterogeneity is crucial, as the negative effect on future investment is magnified when firms are ex-ante exposed to interest rate risk, face financial constraints or lack hedging strategies. These effects operate mainly through a financing and cash flow channel, highlighting the presence of a Finance-Interest-Rate-Uncertainty multiplier, whereby the effects of this uncertainty are amplified by the presence of financial constraints. Conversely, we find no significant effects of long-term interest rate uncertainty on firm decisions.

Suggested Citation

  • Duquerroy, Anna & Istrefi, Klodiana & Mouabbi, Sarah, 2023. "Interest Rate Uncertainty and Firm Decisions," CEPR Discussion Papers 18722, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18722
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    Keywords

    Heterogeneous firms; Financial constraints; Rollover risk; investment; Employment; Cash holdings; Europe;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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