This paper examines the cyclical behavior of small versus large manufacturing firms and their response to monetary policy. The authors aim to quantify the role of credit market imperfections in the business cycle and the monetary transmission mechanism. They find that small firms experience a faster decline in sales compared to large firms following tight money policies, and bank lending to small firms contracts while it rises for large firms. Monetary policy indicators tied to banking performance, such as M2, have greater predictive power for small firms than for large firms. Small firms are also more sensitive to lagged movements in GNP. These findings suggest that credit market imperfections play a significant macroeconomic role, given the substantial contribution of small firms to the economy. The study uses a time series model and data from the Quarterly Financial Report for Manufacturing Corporations (QFR) to analyze the cyclical behavior and co-movements of small and large firms with various monetary policy indicators. The results indicate that small firms are more sensitive to shifts in monetary policy and lagged movements in GNP, and that financial aggregates related to banking, such as M2, are more informative about small firm behavior. The current recession is consistent with these patterns, suggesting a credit crunch affecting small firms.This paper examines the cyclical behavior of small versus large manufacturing firms and their response to monetary policy. The authors aim to quantify the role of credit market imperfections in the business cycle and the monetary transmission mechanism. They find that small firms experience a faster decline in sales compared to large firms following tight money policies, and bank lending to small firms contracts while it rises for large firms. Monetary policy indicators tied to banking performance, such as M2, have greater predictive power for small firms than for large firms. Small firms are also more sensitive to lagged movements in GNP. These findings suggest that credit market imperfections play a significant macroeconomic role, given the substantial contribution of small firms to the economy. The study uses a time series model and data from the Quarterly Financial Report for Manufacturing Corporations (QFR) to analyze the cyclical behavior and co-movements of small and large firms with various monetary policy indicators. The results indicate that small firms are more sensitive to shifts in monetary policy and lagged movements in GNP, and that financial aggregates related to banking, such as M2, are more informative about small firm behavior. The current recession is consistent with these patterns, suggesting a credit crunch affecting small firms.