This thesis consists of three chapters studying how micro-level heterogeneity affects the behaviour of households and businesses, as well as the transmission of macroeconomic shocks to the household and business sectors in aggregate. In Chapter 1, I construct a novel dataset of corporate debt covenants in Australia and examine how the use and structure of debt covenants affect real business activity and the pass-through of monetary policy. I show that exposure to debt covenants disciplines firms’ investment and staff expenses even in the absence of breaches. Also, the shift from interest coverage limits to other types of covenants since the late 2000s may have lowered the responsiveness of investment to monetary policy and accounted for some of the weakness in non-mining investment over the decade. Chapter 2 assesses whether and how local income inequality affects household debt and its composition using household panel data from the HILDA Survey. I find that middle-income households without liquidity and credit constraints borrow more for non-residential investment as local income inequality rises, suggesting that they are trying to close the income gap. They also try to close the consumption gap by accumulating more car debt. Both are consistent with households `keeping up with the Joneses', but unlikely to raise concerns for macro-financial stability. Chapter 3 explores the effects of monetary policy shocks on personal income and its components along the income distribution. I find the effect on total income to be the strongest in the lower-income quintile and relatively even across the rest of the income distribution. Labour income drives the responses in the bottom half of the distribution, while capital income drives the responses in the top half. Public transfers partially offset the effects on the lowest-income earners. Also, most of the pass-through of monetary policy to labour income of low-income individuals comes from the employment channel.