Firm-Level Uncertainty and the Transmission of Forward Guidance to Investment

I study the role of firms' uncertainty in the transmission of forward guidance to investment. To do so, I employ a quarterly firm-level panel of U.S. publicly traded firms. I measure forward guidance shocks based on unexpected changes in the slope of the yield curve in a 30-minute window around Federal Reserve announcements. I show that firms which are more uncertain adjust their investment as if they are more pessimistic. Put differently, more uncertain firms adjust their investment relatively more downward for expected monetary tightenings, and relatively less upward for expected loosenings. To explain my empirical findings, I construct a medium-scale New Keynesian model with two sectors, a high-uncertainty and low-uncertainty one. Agents in the high-uncertainty sector are ambiguous (Knightian uncertain) about the informativeness of forward guidance, and choose to take a pessimistic stance due to their ambiguity aversion. The model implies that expansionary forward guidance is less powerful in recessions due to a larger share of uncertain agents