A DSGE Simulation of Investment Behaviour of U.S. Public Companies under Federal Reserve Rate Hike Shocks: A Refined Draft

Abstract

: This paper refines and completes the original draft by clarifying the internal structure of the model, filling in several previously missing equilibrium conditions, and laying out a more transparent and reproducible simulation plan. The study constructs a three-sector DSGE framework consisting of representative households, profit-maximizing firms, and a monetary authority that implements policy through interest-rate setting. Federal Reserve rate hikes are modelled as exogenous monetary policy shocks that fe ed into firms’ financing environments. By incorporating quadratic investment adjustment costs, the model captures both the gradual nature of capital accumulation and the heightened sensitivity of investment. The simulations show that a positive interest-rate shock increases external financing costs and raises the opportunity cost of capital, thereby compressing investment on impact and, under standard calibrations, for multiple subsequent quarters. The contraction becomes even more pronounced when firms carry high leverage or when strong R&D intensity makes investment projects more irreversible and option-like in value.