Alex Hsu, Indrajit Mitra, and Linghang Zeng
Working Paper 2023-6
June 2023

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We provide firm-level evidence that Federal Open Market Committee announcements have real effects by changing expectations of firm profitability. We use an existing decomposition of a monetary policy shock into a central bank information component (CBI) and a conventional monetary component (MP). We find (1) firms with a higher value of capital asset pricing model (CAPM) beta have a higher investment rate sensitivity to the CBI component; no similar heterogeneity in investment response is observed for the MP component. We also find (2) the heterogeneity in investment sensitivity is due to innovations to firm profitability.

JEL classification: E22, E52, G31

Key words: monetary policy, Fed information shocks, investments, CAPM beta

The authors thank Hengjie Ai, Francesco Bianchi, Toni Braun, Leonid Kogan, Lubos Pastor, Juan Rubio-Ramirez, Jerome Taillard, Michael Weber, Toni Whited, Jonathan Wright, Tao Zha, seminar participants at Babson College, the Federal Reserve Bank of Atlanta, the Georgia Institute of Technology, Kennesaw State University, Queen Mary University of London, and the University of Warwick 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; or Linghang Zeng, Babson College.

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