The Effects of Monetary Policy and Interest Rate Volatility on Investment and Corporate Performance

Abstract

The study is an empirical study of how changes in monetary policy and volatility in interest rates impact investment decisions in corporations and firm performance in general. The study analyses the relationship between the changes in the central bank policy rates, money supply, and fluctuation in interest rates and the distribution of capital, profitability, as well as long-term economic growth using panel data of listed firms across various countries between 2000 and 2024. Using fixed-effects regression equations and GARCH-based measures of interest rate volatility, the analysis will be able to identify both the short-term and long-term impact of monetary policy on the financial performance of a firm. The findings suggest that the effect of monetary easing on corporate investment is usually to boost investment by young and highly levered companies, but doing the opposite through contractionary policies. Interest rate volatility on the contrary is established to have negative implications on investment planning and long term capital formation meaning that it is more uncertain on the cost of financing and the risk adjusted returns. The results also point out the sectoral differences with the capital-intensive industries being more sensitive to monetary policy shocks. The findings are empirical support of the mechanism of transmission of the monetary policy at a microeconomic level and the value of policy stability in promoting sustainable investment and economic growth. The research provides information to policymakers, corporate financial managers, and investors who may want to know the complicated relationship between the macroeconomic policy and the decision-making process related to the firm.