Authors: Thomas Drechsel, Davide Melcangi, Laura Pilossoph, and Daniel Lewis
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Staff Reports
The Investment Channel of Monetary Policy: Disentangling Firm Heterogeneity
Number 1210
October 2026
October 2026
JEL classification: E22, E32, E52
To study monetary policy transmission at the firm level, researchers typically consider heterogeneity along a small number of firm characteristics, such as size or leverage. We instead estimate the full distribution of firms’ investment responses to monetary policy, using a clustering regression framework. Our novel approach captures multidimensional and unobservable heterogeneity across firms and time. We find that investment by most firms in most time periods responds little to monetary policy. Only about 5 percent of firm-time observations are associated with a strong response. We then investigate the sources of heterogeneity ex post. We find that most of the variation in investment sensitivity arises within firms over time. Although several firm characteristics predict responsiveness to monetary policy, the majority of heterogeneity remains unexplained by firm observables. We demonstrate that our empirical estimates provide new targets for disciplining structural models of firm heterogeneity.
Author Disclosure Statement(s)
Thomas Drechsel
The author declares that he has no relevant or material financial interests that relate to the research described in this blog.
Daniel Lewis
During the past three years, I received consultancy fees exceeding the disclosure threshold under the AEA Disclosure Policy from Banque de France, a potentially interested party with respect to the subject matter of this article. The consultancy relationship did not affect the design, analysis, interpretation, or reporting of the research. The interested party had no right to review this research.
Davide Melcangi
I declare that I have no relevant or material financial interests that relate to the research described in this paper. I also declare that the views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.
Laura Pilossoph
The author declares that she has no relevant or material financial interests that relate to the research described in this blog post. This disclosure is made in accordance with the American Economic Association’s Disclosure Policy. The author holds no financial interest of $10,000 or more in any firm or sector with a financial, ideological, or political stake related to the material presented; has received no financial support from any interested party in connection with this work; and has granted no data vendor or sponsor a right to review the submission prior to publication.
The author declares that he has no relevant or material financial interests that relate to the research described in this blog.
Daniel Lewis
During the past three years, I received consultancy fees exceeding the disclosure threshold under the AEA Disclosure Policy from Banque de France, a potentially interested party with respect to the subject matter of this article. The consultancy relationship did not affect the design, analysis, interpretation, or reporting of the research. The interested party had no right to review this research.
Davide Melcangi
I declare that I have no relevant or material financial interests that relate to the research described in this paper. I also declare that the views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.
Laura Pilossoph
The author declares that she has no relevant or material financial interests that relate to the research described in this blog post. This disclosure is made in accordance with the American Economic Association’s Disclosure Policy. The author holds no financial interest of $10,000 or more in any firm or sector with a financial, ideological, or political stake related to the material presented; has received no financial support from any interested party in connection with this work; and has granted no data vendor or sponsor a right to review the submission prior to publication.
Suggested Citation:
Drechsel, Thomas, Daniel Lewis, Davide Melcangi, and Laura Pilossoph. 2026. “The Investment Channel of Monetary Policy: Disentangling Firm Heterogeneity.” Federal Reserve Bank of New York Staff Reports, no. 1210, October. https://doi.org/10.59576/sr.1210
Drechsel, Thomas, Daniel Lewis, Davide Melcangi, and Laura Pilossoph. 2026. “The Investment Channel of Monetary Policy: Disentangling Firm Heterogeneity.” Federal Reserve Bank of New York Staff Reports, no. 1210, October. https://doi.org/10.59576/sr.1210
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