This paper offers a new perspective on the transmission of monetary policy using household data for the U.S. and U.K.. Following a temporary cut in interest rates, households with mortgage debt increase their spending significantly, home-owners without debt do not adjust expenditure at all and renters increase spending but by less than mortgagors. Income, however, rises considerably for all households. We show that the balance sheets of these housing tenure groups differ markedly in their composition of liquid versus illiquid wealth. This heterogeneity in liquidity holdings, together with a sizable general equilibrium effect on income, is crucial for explaining our results. In contrast, differences in demographics, the elasticity of intertemporal substitution, wealth effects and the response of mortgage and rental payments are unable to account for the heterogeneity in expenditure we document.

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We provide new evidence on how monetary policy affects investment and fi rm fi nance in the United States and the United Kingdom. Younger fi rms paying no dividends exhibit the largest and most signifcant change in capital expenditure -even after conditioning on size, asset growth, Tobin's Q, leverage or liquidity -and drive the response of aggregate investment.Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all fi rms but borrowing declines only for younger non-dividend payers, as their external fi nance is mostly exposed to asset value fl uctuations. Conversely, cash-fl ows change less markedly and more homogeneously across groups. Our fi ndings highlight the role of fi rm fi nance and fi nancial frictions in amplifying the effects of monetary policy on investment.Keywords: monetary policy, fi nancial frictions, fi rm fi nance, investment.JEL classifi cation: E22, E32, E52. ResumenEn este trabajo se presenta nueva evidencia acerca del efecto que la política monetaria tiene sobre la inversión y la fi nanciación de las empresas en Estados Unidos y en el Reino Unido.Las empresas más jóvenes y que no pagan dividendos son las que muestran la mayor, -y estadísticamente signifi cativa-, reacción en términos de inversión en capital fi jo, mientras que las empresas relativamente antiguas casi no presentan reacción alguna. Esto es así aun controlando por características tradicionales en esta literatura, como son el tamaño, el crecimiento en activos, la valuación, el apalancamiento y liquidez. La reacción de empresas jóvenes que no pagan dividendos explica el movimiento de la inversión agregada. Después de una contracción en la política monetaria, se observa una reacción de la valuación de todas las empresas, mientras que la deuda responde solo para aquellas empresas jóvenes que no pagan dividendos. Esto se debe a que estas últimas son las más expuestas a cambios en el valor del colateral a la hora de endeudarse. Por otro lado, se observa también una reacción en los fl ujos de caja, aunque dicha reacción es relativamente pequeña y homogénea entre empresas. Estos resultados resaltan la importancia de la estructura fi nanciera, así como de las fricciones en la fi nanciación externa de las empresas, en la amplifi cación de los efectos de la política monetaria sobre la inversión empresarial.Palabras clave: política monetaria, fricciones fi nancieras, fi nanciación empresarial, inversión.

Using household survey data for the U.S. and the U.K., we show that the aggregate response of consumption to interest rate changes is driven by households with a mortgage. Outright home-owners do not adjust expenditure at all while renters change their spending but by less than mortgagors. Income rises for all households as interest rate cuts directly affect firm investment and household consumption, boosting aggregate demand. A crucial difference between the housing tenure groups is the composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid wealth. Our results reveal that general equilibrium effects on household income coupled with balance-sheet-driven heterogeneity in the marginal propensity to consume play a key role in the transmission of monetary policy.

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