How monetary policy shapes corporate investment plans
This working paper by Julia Selgrad and Kerry Siani tackles a longstanding puzzle in macroeconomics: why business investment responds to monetary policy only after long, variable lags.
The authors build a hand-collected dataset of 46,871 investment plans from 881 large U.S. non-financial firms (1999–2024), drawn from SEC filings, earnings calls, and investor presentations, merged with IBES/LSEG guidance data to cover around 80% of U.S. corporate capex. They use these disclosed forward-looking plans as their outcome variable, since plans predict actual future capex well. To identify causal effects, they instrument quarterly U.S. Treasury yield changes with high-frequency monetary policy surprises around FOMC announcements, regressing planned investment at each horizon (1–5 years) on these instrumented yield shocks, controlling for firm and macro characteristics. Qualitative tags on plan type (new vs. ongoing projects, R&D, environmental, etc.) let them test whether adjustment-cost frictions explain differential responsiveness across investment types and horizons.
Findings
- There is a pronounced “term structure of responsiveness”: long-horizon investment plans (2+ years out) react much more strongly to monetary policy shocks than near-term plans, and these revisions happen within a single quarter of the shock.
- Plans for new projects are far more sensitive to policy than plans for ongoing projects, consistent with partial irreversibility/adjustment-cost theories of capital production frictions.
- Estimated elasticities of investment to the user cost of capital rise with horizon: about 2.6 at one year, 4.5 over two years, and roughly 6.5 at longer horizons, in line with or above prior estimates.
- Evidence points to a cost-of-capital transmission channel: firms with near-term debt maturities, longer-duration assets, and greater sensitivity to long-term (versus short-term) yields respond more strongly, and firms cut net debt issuance quickly (within 2–3 months) after policy-driven yield increases.
- A cash-flow expectations channel also operates at longer horizons but is quantitatively modest.
- Overall, the long lags in realized investment’s response to monetary policy are explained not by slow updating of beliefs (plans adjust within a quarter) but by production/adjustment frictions that make committed, ongoing investment costly to reverse.
Monetary Policy and Investment Plans
Authors: Julia Selgrad, Kerry Siani
From: University of Chicago, MIT
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How monetary policy shapes corporate investment plans: disentangling firm heterogeneity
This paper by Thomas Drechsel, Daniel Lewis, Davide Melcangi, and Laura Pilossoph estimates the full distribution of how firms’ investment responds to monetary policy shocks, rather than restricting attention to one or two pre-selected firm characteristics like size or leverage.
The authors follow Ottonello and Winberry (2020)‘s panel local-projection setup on Compustat quarterly data (1991–2007), regressing firm capital growth on high-frequency monetary policy surprises with firm fixed effects and macro controls. Instead of interacting the shock with one pre-chosen firm characteristic, they use a Gaussian mixture clustering method (GMLR) to sort firm-quarter observations into a small number of latent groups, each with its own estimated sensitivity to policy shocks, estimated via the EM algorithm. They then link these estimated sensitivities ex post to firm characteristics (size, age, leverage, cash, debt maturity, discount-rate measures) via regression, and extend the approach to longer horizons (up to two years) to build group-specific impulse responses.
Findings
- Investment responsiveness is highly skewed: about a third of firms show minimal sensitivity, while only about 5% show strong responses, roughly eight times larger, implying a 25bp rate hike cuts quarterly capital growth by about 1pp in that group.
- No group has zero responsiveness; all firms respond at least slightly to rate changes.
- About 80% of responsiveness of investment to monetary policy (RIMP) variation occurs within firms over time rather than across firms, and high responsiveness is highly transient: a firm with the largest RIMP has only a 12% chance of repeating that response next quarter, versus 59% persistence for the least responsive group.
- Traditional firm characteristics (size, age, leverage, cash ratio, debt maturity) are statistically significant correlates i.e. smaller and younger firms are more sensitive, confirming prior literature, but jointly explain only about 5% of RIMP variation, leaving most heterogeneity unexplained by observables.
- Novel corporate finance measures matter more: firms with larger “discount-rate wedges,” more volatile (less sticky) discount rates, and lower CFO optimism about their own firm show significantly larger investment responses.
- At longer horizons (up to two years), heterogeneity in the RIMP grows even larger and more persistent, with small, young, and liquid firms remaining the most elastic.
The Investment Channel of Monetary Policy: Disentangling Firm Heterogeneity
Authors: Thomas Drechsel, Daniel Lewis, Davide Melcangi, Laura Pilossoph
From: Johns Hopkins University, University College London, Federal Reserve Bank of New York, Duke University
