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This article studies monetary policy in a model in which credit constraints are the only source of non-neutralities. I show that sizeable real effects can be obtained in a framework that is also able to match the term premium and generate an upward-sloping yield curve. Moreover, monetary policy has the expected effect on real and nominal variables as well as on asset prices. Combining financing frictions with a lower bound on interest rates generates large asymmetries in the transmission mechanism. The state of the economy therefore matters as money becomes close to neutral when credit is ample and easily obtainable. In contrast, monetary policy is particularly effective during periods of credit crunches and high lending spreads. Resorting to higher-order approximations is necessary to detect this asymmetry.
