This paper shows that access to credit and its composition shape how firms around the world respond to US monetary policy. Using cross-country firm-level data, I find that trade credit—supplier financing via costly delayed payments—declines less than bank credit following a US monetary tightening and so does the investment of firms that rely on it. To rationalize these findings, I develop a two-sector small open economy model with heterogeneous firms and endogenous trade credit. In the model, trade credit emerges as a risk-sharing mechanism between firms with different risk preferences along the supply chain—arising from relative differences in financial constraints. This mechanism dampens the pass-through of US monetary policy shocks relative to bank credit, which is directly affected due to the international funding structure of banks. The model replicates the observed cross-sectional patterns and shows that increasing the share of trade credit reliant firms smooths the international transmission of US monetary to aggregate investment and output.

This paper studies the relationship between capital misallocation and deviations from the Uncovered Interest Parity (UIP). In a theoretical framework where firms borrow in different currencies, we show that UIP deviations generate heterogeneous borrowing costs. When firms are equally productive, these cost differentials distort the allocation of capital. Using firm-loan matched administrative data from Uruguay spanning 2012-2019, we find that declines in UIP deviations are associated with significant increases in capital misallocation. A one-standard deviation decline in UIP deviations leads to a cumulative increase in capital misallocation of 11 percentage points over three years, and around four percentage points contemporaneously—accounting for a significant portion of the observed rise in misallocation during this period. We provide evidence that this effect is driven by firms switching their borrowing currency in response to relative costs implied by the UIP. Access to dollar borrowing is selective, limited to larger and more productive firms. As UIP deviations decrease, peso borrowing becomes relatively cheaper, enabling smaller, less productive firms—excluded from dollar credit—to access peso financing. This reallocation of credit contributes to a worsening in the efficiency of capital allocation.