Monetary Policy Shocks and Firm Heterogeneity: A Cross-Country Comparison

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monetary policy
firm heterogeneity
firm size
advanced economy
emerging market
interest rates
Corporate Finance
International Business
International Economics
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This paper examines the extent to which monetary policy shock transmission effects differ within foreign countries due to firm heterogeneity. Current research heavily examines monetary policy in the US and a few other advanced economies; however, there is less extensive information regarding other foreign countries. The conceptual question of the paper is whether firms in foreign countries are affected by monetary policy shocks differently compared to firms in the US and to what extent. This paper discusses the effects of monetary policy in a sample of 43-48 countries. One of the most widely used measures of monetary policy shocks utilizes a high-frequency event study approach with the Fed Funds Rate and US interest rate futures; however, this paper constructs shocks based on the predicted residuals of VAR models due to limited financial markets information in other countries. The paper then looks at firm-level data and how monetary policy transmission differs in other countries due to varying levels of firm heterogeneity. This paper’s contribution consists of taking on an international scope and focusing on differences between advanced and emerging market economies. Additionally, it uses an aggregate measure of firm heterogeneity and provides an analysis at the broader country level. Ultimately, the paper seeks to assess the effect of a shock on the economy with more complete information than before. From a firm perspective, knowing how others react to monetary policy decisions and anticipating changes can be beneficial for navigating unexpected economic environments. Additionally, from an investor standpoint, it may be useful when pricing sovereign debt to understand how firms within a country are affected by the central bank. Lastly, the topic is important because it will show aggregate macroeconomic responses in other countries, such as on domestic output, employment, inflation, etc. This will be useful to regulators, policymakers, and academics looking to expand their knowledge of shocks in foreign countries.

Sergio Salgado
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