Interest Rate Uncertainty and Firm Decisions

Anna Duquerroy, Klodiana Istrefi and Sarah Mouabbi

No 18722, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the effects of uncertainty regarding the path of interest rates on firms decisions in the euro area. In the presence of heightened short-term interest rate uncertainty, firms tend to decrease their future investments and hiring activities. They also adopt a more cautious approach by hoarding cash and cutting dividend payments. Firm heterogeneity is crucial, as the negative effect on future investment is magnified when firms are ex-ante exposed to interest rate risk, face financial constraints or lack hedging strategies. These effects operate mainly through a financing and cash flow channel, highlighting the presence of a Finance-Interest-Rate-Uncertainty multiplier, whereby the effects of this uncertainty are amplified by the presence of financial constraints. Conversely, we find no significant effects of long-term interest rate uncertainty on firm decisions.

Keywords: Heterogeneous firms; Financial constraints; Rollover risk; investment; Employment; Cash holdings; Europe (search for similar items in EconPapers)
JEL-codes: E22 E43 E52 G32 (search for similar items in EconPapers)
Date: 2023-12
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Working Paper: Interest Rate Uncertainty and Firm Decisions (2024)
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