This paper examines the impact of monetary policy shocks on the borrowing and lending activities of different sectors of the economy using the Flow of Funds accounts. The authors define contractionary monetary policy shocks as those associated with a fall in nonborrowed reserves, total reserves, M1, the Federal Reserve's holdings of government securities, and an increase in the federal funds rate. These shocks lead to persistent declines in real GDP, employment, retail sales, and nonfinancial corporate profits, as well as increases in unemployment and manufacturing inventories. Commodity prices also decline sharply and persistently, while the GDP price deflator remains stable for about a year before declining. The paper's key findings include: 1. After a contractionary monetary policy shock, the net funds raised by the business sector initially increase for about a year, then begin to decline as the recession deepens. 2. There is little evidence that households adjust their financial assets and liabilities immediately after a monetary shock, consistent with the assumption in several recent monetary business cycle models. 3. 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, which is attributed to a temporary increase in personal tax receipts. 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 assess the plausibility of these measures and present evidence on their dynamic responses to policy shocks. The results support the view that these measures are reasonable representations of exogenous money supply shocks.This paper examines the impact of monetary policy shocks on the borrowing and lending activities of different sectors of the economy using the Flow of Funds accounts. The authors define contractionary monetary policy shocks as those associated with a fall in nonborrowed reserves, total reserves, M1, the Federal Reserve's holdings of government securities, and an increase in the federal funds rate. These shocks lead to persistent declines in real GDP, employment, retail sales, and nonfinancial corporate profits, as well as increases in unemployment and manufacturing inventories. Commodity prices also decline sharply and persistently, while the GDP price deflator remains stable for about a year before declining. The paper's key findings include: 1. After a contractionary monetary policy shock, the net funds raised by the business sector initially increase for about a year, then begin to decline as the recession deepens. 2. There is little evidence that households adjust their financial assets and liabilities immediately after a monetary shock, consistent with the assumption in several recent monetary business cycle models. 3. 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, which is attributed to a temporary increase in personal tax receipts. 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 assess the plausibility of these measures and present evidence on their dynamic responses to policy shocks. The results support the view that these measures are reasonable representations of exogenous money supply shocks.