Alex Hsu, Indrajit Mitra, Yu Xu, and Linghang Zeng
Working Paper 2023-6a
June 2023 (Revised March 2024)
Abstract:
We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to explain these patterns. Our model rationalizes the slow decline in inflation in 2022–23 despite aggressive policy rate hikes.
JEL classification: E22, E52, G31
Key words: monetary policy, Fed information effect, heterogeneous investment response
https://doi.org/10.29338/wp2023-06a
The authors thank Hengjie Ai, Francesco Bianchi, Toni Braun, Leonid Kogan, Lubos Pastor, Juan Rubio-Ramirez, Jerome Taillard, Michael Weber, Tao Zha, and seminar participants for their helpful comments and suggestions. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Alex Hsu, Scheller College of Business, Georgia Institute of Technology; Indrajit Mitra, Federal Reserve Bank of Atlanta; Yu Xu, Lerner College of Business and Economics at the University of Delaware; or Linghang Zeng, Babson College.
To receive e-mail notifications about new papers, subscribe. Under "Publications" select "Working Papers."