Inflation, interest rate, and firm efficiency: The impact of policy uncertainty

This study investigates the effect of inflation and interest rate on firm efficiency while exploring the role of policy uncertainty. Not a misnomer, macroeconomic conditions mat-ter, and their impact on business strategy are inherently observed directly or indirectly. Yet, there is still a shortage of literature relating inflation and interest rate through the moderating effect of policy uncertainty on firm efficiency. With 92,293 observations from 12,207 US firms, we find that inflation positively affects firm efficiency, and interest rate negatively affects firms' efficiency. Similarly, the moderating effect of policy uncertainty amplifies the significance of inflation and interest rate. Further examination of the moder-ating impact finds a positive directionality for both macroeconomic conditions for larger firms, firms that pay dividends, firms with a higher cost of goods and services and higher sales, and firms located in the Midwest region. The results are robust to firm-year fixed effects and clustering approaches.Published by Elsevier Ltd.