The Firm-Level Effects of Monetary Policy : Implications for Firm Performance

We study the dynamic transmission of monetary policy shocks into firm profitability. By gauging the net effect of consumers’ and managers’ responses to these shocks, we find an initial negative association between the shocks and firm revenues and expenses. The revenue response is consistent with a consumer substitution effect, while the expense response is consistent with a firm cost of capital effect. In subsequent quarters, the expense effect exceeds the revenue effect, yielding a positive relation between the shocks and profitability. Using cross-sectional tests, we show that substitution (cost of capital) effects are a function of consumers’ (firms’) financing constraints, firms’ industry membership, and the scope of firms’ international activities