This paper uses the Flow of Funds accounts to assess the impact of a monetary policy shock on the borrowing and lending activities of different sectors of the economy. The authors measure contractionary monetary policy shocks by their association with a fall in nonborrowed reserves, total reserves, M1, the Federal Reserve's holdings of government securities, and a rise in the federal funds rate. These shocks lead to persistent declines in real GNP, employment, retail sales, and nonfinancial corporate profits, as well as increases in unemployment and manufacturing inventories. Commodity prices also fall sharply, and the GDP price deflator does not respond for about a year before declining. The authors find that following a contractionary monetary policy shock, net funds raised by the business sector increase for about a year, then begin to fall as the recession deepens. This pattern is not captured by existing monetary business cycle models. They also find that households do not adjust their financial assets and liabilities for several quarters after a monetary shock, consistent with key assumptions of recent monetary business cycle models. The authors use two measures of exogenous shocks to monetary policy: orthogonalized shocks to the federal funds rate and orthogonalized shocks to nonborrowed reserves. They find that these shocks lead to persistent declines in real GNP, employment, retail sales, and nonfinancial corporate profits, as well as increases in unemployment and manufacturing inventories. Commodity prices also fall sharply, and the GDP price deflator does not respond for about a year before declining. The authors find that the increase in net funds raised by firms after a contractionary policy shock coincides with a temporary reduction in net funds raised by the government. They find this result puzzling and attempt to find what aspect of the government's expenditures and receipts can account for it. For the federal funds based measure of policy shocks, this reduction can be traced to a temporary increase in personal tax receipts. After about a year, as the recession takes hold and net funds raised by the business and household sectors fall, net funds raised by the government sector increases (i.e., the government budget deficit goes up). The authors find that the response of net funds raised by the business sector to a contractionary monetary policy shock is not captured by existing monetary business cycle models. They also find that households do not adjust their financial assets and liabilities for several quarters after a monetary shock, consistent with key assumptions of recent monetary business cycle models. The authors also find that the response of net funds raised by the government sector to a contractionary monetary policy shock is not captured by existing monetary business cycle models. They find that the initial decline in government borrowing after a contractionary FF policy shock is small, but they find it puzzling. They investigate the source of the decline and find that it is due to a temporary increase in personal tax receipts. After about a year, as the recession takes hold and net funds raised by the business and household sectors fall, net funds raised by the government sector increases (i.eThis paper uses the Flow of Funds accounts to assess the impact of a monetary policy shock on the borrowing and lending activities of different sectors of the economy. The authors measure contractionary monetary policy shocks by their association with a fall in nonborrowed reserves, total reserves, M1, the Federal Reserve's holdings of government securities, and a rise in the federal funds rate. These shocks lead to persistent declines in real GNP, employment, retail sales, and nonfinancial corporate profits, as well as increases in unemployment and manufacturing inventories. Commodity prices also fall sharply, and the GDP price deflator does not respond for about a year before declining. The authors find that following a contractionary monetary policy shock, net funds raised by the business sector increase for about a year, then begin to fall as the recession deepens. This pattern is not captured by existing monetary business cycle models. They also find that households do not adjust their financial assets and liabilities for several quarters after a monetary shock, consistent with key assumptions of recent monetary business cycle models. The authors use two measures of exogenous shocks to monetary policy: orthogonalized shocks to the federal funds rate and orthogonalized shocks to nonborrowed reserves. They find that these shocks lead to persistent declines in real GNP, employment, retail sales, and nonfinancial corporate profits, as well as increases in unemployment and manufacturing inventories. Commodity prices also fall sharply, and the GDP price deflator does not respond for about a year before declining. The authors find that the increase in net funds raised by firms after a contractionary policy shock coincides with a temporary reduction in net funds raised by the government. They find this result puzzling and attempt to find what aspect of the government's expenditures and receipts can account for it. For the federal funds based measure of policy shocks, this reduction can be traced to a temporary increase in personal tax receipts. After about a year, as the recession takes hold and net funds raised by the business and household sectors fall, net funds raised by the government sector increases (i.e., the government budget deficit goes up). The authors find that the response of net funds raised by the business sector to a contractionary monetary policy shock is not captured by existing monetary business cycle models. They also find that households do not adjust their financial assets and liabilities for several quarters after a monetary shock, consistent with key assumptions of recent monetary business cycle models. The authors also find that the response of net funds raised by the government sector to a contractionary monetary policy shock is not captured by existing monetary business cycle models. They find that the initial decline in government borrowing after a contractionary FF policy shock is small, but they find it puzzling. They investigate the source of the decline and find that it is due to a temporary increase in personal tax receipts. After about a year, as the recession takes hold and net funds raised by the business and household sectors fall, net funds raised by the government sector increases (i.e