Uncertainty and corporate investments in response to the Fed's dual shocks

Abstract

The Federal Reserve's impact on corporate investments varies with the type of monetary shock. From a conventional standpoint, contractionary monetary shocks trigger a rise in financing costs that significantly reduce investment. Such effects are predicted by the widely investigated monetary policy channels. However, we highlight informational circumstances under which monetary contraction reduces uncertainty and incentivizes a rise in investment. These effects arise when monetary tightening conveys a positive assessment of the macroeconomic outlook by the Fed. We further show that the positive effect of contractionary Fed information shocks on investment is largely driven by these shocks’ ability to reduce uncertainty.