I develop a DSGE model with heterogeneous investors, in which the efficiency of risk-sharing in the financial market and the efficiency of capital allocation result in a feedback loop.

Using a measure of equity and debt financial constraint, we show that equity frictions are central to understanding the transmission of monetary policy to the corporate sector.

Using consumer credit records, we show that monetary tightening increases household debt, particularly among financially constrained borrowers.

This paper studies a general equilibrium model with heterogeneity in both risk aversion and beliefs about the expected growth rate of the aggregate endowment.