Monetary policy shocks and firm investment decisions: Evidence from China

This paper investigates how unexpected monetary policy changes affect corporate investment decisions in China. Using monetary policy shocks estimated with a sophisticated technique, we show that Chinese public firms significantly change their investment to accommodate unexpected monetary policy shifts. Moreover, such a reaction is significant mainly when a restrictive monetary policy shock occurs and can last for six quarters. Further cross-sectional analyses confirm that the heterogeneous responses of investment depend on many firm-level characteristics, such as firm ownership, growth opportunities, local market development, and firm age. • Monetary policy shocks affect firms’ real investment for up to six quarters. • Firms increase investment in financial assets during monetary expansion periods. • Firms’ characteristics affect their investment response to monetary policy shocks.