This thesis contains three independent essays studying the role of firm heterogeneity in the transmission of macroeconomic shocks and policies to the economy. In the first chapter, written jointly with Johannes Fischer, we analyse the effect of monetary policy on mergers and acquisitions (M&A) activity in the U.S. We provide causal evidence that contractionary monetary policy reduces aggregate M&A activity. In the cross-section of U.S. publicly listed companies, we show that this effect is particularly pronounced among financially constrained firms, leading to a change in the composition of firms conducting M&A in response to monetary contractions. As a result of this selection effect, contractionary monetary policy increases the quality of M&A deals taking place since fewer financially constrained firms engage in M&A. Finally, we provide evidence that following a monetary tightening, acquirers match with relatively smaller and younger target firms. The profitability of targets firms, relative to acquiring firms, does not change. In the second chapter, written jointly with Russell Cooper and Leonardo Indraccolo, we study the effects of Covid-19 on manufacturing output, employment and productivity across a set of European countries. Using a quantitative firm dynamics model with endogenous entry and exit, we estimate the key parameters of adjustment costs and market power to match the country-specific responsiveness of firms to exogenous shocks. We then use the estimated model to simulate the effects of the Covid-19 shock, with and without policy support measures. As seen through counterfactual exercises, the main impact of the policy interventions, treated here as work-sharing schemes targeted to low profitability firms and “no-firing" obligations, was to mitigate the drop in aggregate employment by keeping firms in business. We calculate that the aggregate drop in employment would have been between 1.0 and 1.9 percentage points higher across countries without policy support. We do not find evidence of adverse productivity effects from these interventions. Building on these counterfactuals, we, furthermore, establish the importance of targeted subsidies and the sensitivity of employment responses to firm beliefs. In the third chapter, I study the implications of public procurement for the transmission of monetary policy to asset prices and firm-level investment. I document that, among publicly listed U.S. companies, contracting with the government dampens the response of both stock returns and physical investment to monetary policy shocks. I provide novel evidence suggesting that federal procurement is less responsive to monetary policy shocks than private sector demand, providing an additional channel of insurance to government contractors against the adverse effects of monetary policy on final demand. I find only limited evidence for a weaker credit channel among government contractors.