We study the effects of monetary policy shocks on corporate investment and financing. Using the Federal Reserve FR Y-14Q data, we find a stark difference between the responses of public and private firms to these shocks. Following an unexpected rise in the policy interest rate, private firms decrease their debt, equity, and real assets. Public firms decrease their debt, but raise equity to offset the impact, resulting in no change in their real assets. Thus, the difference in the use of equity leads to diverging real responses to monetary policy shocks. We develop a structural model to explain the differences in the policy impacts. The model suggests that the combination of higher equity issuance costs at private firms and greater investment adjustment costs at public firms drives the differences in monetary policy responses.

We study how financial contract structures in municipal financing influence regional heterogeneity in monetary policy transmission to the real economy. We identify our results exploring variation in municipal bond callability during the 2008 Federal Reserve easing cycle. We show that contractual flexibility led to greater bond issuance, expanded investments, and reduced interest expenses. These fiscal activities translated into higher income and lower unemployment at the local level. Our findings highlight local governments' significant role in shaping monetary policy transmission, revealing how their financial flexibility can either amplify or diminish the broader economic effects of monetary policy.

Large-scale asset purchases by a central bank (quantitative easing, QE) induce a strong and persistent increase in excess liquidity and deposits in the banking sector and, therefore, leads to an expansion of banks' balance sheets. In the euro area, excess liquidity and QE-created deposits are heterogeneously distributed across the member states. First, this paper uses local projection (LP) techniques to analyze the transmission of monetary policy to bank lending, conditional on a country's excess liquidity holdings. We find that in a high liquidity country, such as Germany, an increase in the level of excess liquidity significantly dampens the effect of a monetary shock over time, while the transmission is amplified for a low-liquidity country, such as Italy. Second, we shed some light on these results in a two-country New Keynesian model. We show that QE has two opposing effects on banks' costs: (i) QE decreases long-term interest rates and, therefore, banks' refinancing costs; (ii) QE-created excess liquidity and deposits expand banks' balance sheets and increase balance sheet costs. Furthermore, QE-created deposits are not loanable funds but banks create deposits when granting loans, implying that bank lending does not increase in QE-created deposits. These model features imply a reverse bank lending channel, which dampens the expansionary effects of QE and the contractionary effects of quantitative tightening (QT). These dampening effects differ across euro area countries.