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Abstract

Using almost 30 years of detailed firm-level data for the U.S. and U.K., we provide novel evidence on how monetary policy affects firm investment and finance. We find that relatively young firms paying no dividends are the most sensitive in terms of capital expenditures, and their response to interest rate changes drives the movement in aggregate investment. On the other hand, older firms (that pay dividends) don’t respond at all. The main mechanism behind these result works through the heterogeneous exposure to asset price movements. Standard theories of firm dynamics allow for only a marginal role of age as a predictor of the response to
shocks. We present an extension which can reconcile model and data.