The Income Statement Channel of Monetary Policy

We study the dynamic transmission of monetary policy shocks into corporate profitability. We find an initial negative association between monetary policy shocks and corporate revenues and expenses. The revenue response is consistent with a consumer substitution effect, while the expense response is consistent with a firm cost of capital effect. The expense effect exceeds the revenue effect, yielding a positive relation between the shocks and profitability in the short run. The effect is concentrated in cash revenues and expenses. Results vary predictably with consumers’ and firms’ financial constraints, firms’ business models, and the accounting treatment of firms’ investment outlays.