Firms’ Inflation Exposure and Monetary Policy Shocks

We establish a link between a firm’s response to inflation shocks and its reaction to unexpected changes in monetary policy. Specifically, we show that firms with higher inflation exposure experience stronger negative stock price reactions to monetary tightening shocks. This relationship is state-dependent, varying across economic regimes. During highinflation periods, such as the COVID-19 pandemic, firms with positive inflation exposure exhibit sharper declines following unexpected monetary tightening, whereas during the Global Financial Crisis (GFC), the opposite occurs due to deflationary pressures. This pattern holds for both daily monetary shocks and FOMC announcement days.