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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.

In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that these types of financial frictions play an important role in the transmission of monetary policy.

In this paper, we quantify the effects of the Earned Income Tax Credit (EITC) from a macroeconomic perspective. We analyze jointly the labor supply and saving responses to changes in tax credit generosity and their aggregate and distributional implications. Our results show that the EITC raises labor force participation, provides insurance to working poor households but also disincentivizes private savings for many. Whilst reducing post-tax earnings inequality, the EITC contributes to a higher skill premium and wealth inequality. Finally, EITC expansions are welfare improving for the majority of the population, both ex ante and when accounting for transitional dynamics.

This paper quantifies the individual, aggregate and welfare effects of the US Earned Income Tax Credit (EITC). In particular, we analyze the labour supply and saving responses to changes in tax credit generosity and their implications for prices and welfare. Our results show that the EITC is a subsidy on labour income and a tax on savings. An increase in EITC generosity raises labour force participation, reduces savings for many and provides insurance to working poor households. The EITC reduces earnings inequality but increases the skill premium and wealth inequality. A 10% increase in tax credit generosity increases welfare by 0.31% and benefits the majority of the population.