Working Paper

The Profitability Channel of Monetary Policy Transmission

Abstract: 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.

Keywords: monetary policy; Fed information shocks; investments; CAPM beta;

JEL Classification: E22; E52; G31;

https://doi.org/10.29338/wp2023-06

Status: Published in 2023

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2023-06-20

Number: 2023-06