Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment

While investment in most sectors declines response to a contractionary monetary policy shock, the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for universe of US firms, I show this increase is driven by types firms which are least likely be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained able take advantage decline user cost capital caused contraction while constrained forced cut back. Counterfactual exercises suggest that should become more strongly countercyclical as fewer face constraints.