Ruslana Datsenko, University of Oslo (Job Market Seminar)

"Monetary Policy Transmission and Firm-Level Volatility: Uncertainty Versus Risks"

Abstract

I study the role of firm-level volatility and default risk in the transmission of monetary policy to investments in fixed assets. Empirically, I find that firms facing lower volatility are more responsive to monetary policy than firms facing higher volatility. I demonstrate that this finding is due to two channels through which volatility determines monetary policy transmission. First, volatility increases default risk, increasing borrowed funds' price. Second, volatility increases firms' hesitancy to invest (real options channel). Contrasting with the earlier literature, I show that the real options channel rather than the default risk channel matters for monetary policy transmission. Moreover, I find that the channel through which the monetary policy transmission takes place - real options or risk premium - determines whether the monetary policy increases or decreases aggregate capital relative to a model without heterogeneity, adjustment costs, and financial frictions.

Contact person: Jeppe Druedahl