Monetary policy uncertainty and firm risk-taking

This paper analyzes the impact of monetary policy uncertainty (MPU) on firm risk-taking. We introduce a model to explore the investment behavior of a firm when greater monetary policy uncertainty occurs. The model predicts that, to limit risk exposure, a firm tends to lower its capital stock and thereby reduce its risk-taking. Utilizing the firm-level data from China over the period of 2000-2019, we show that MPU can significantly reduce corporate risk-taking. Moreover, we find that firms with financing constraints become risk averse when faced with MPU shocks. This paper sheds light on both theoretical basis and practical reference for firms to make better decisions on high-risk projects.