This study explores the effects of monetary policy on firms’ business fixed investment spending through the interest rate and broad credit channel of monetary policy transmission in Pakistan by using disaggregated firm level data of manufacturing sector during 1974-2010. Neo-classical investment model is used to identify the interest rate and broad credit channel. User cost of capital indicates the presence of interest rate channel while cash flow to capital stock ratio is used as a proxy to identify the broad credit channel. Firm specific user cost of capital is constructed by using firm level information related to debt, equity, and apparent interest rate. Sales as well as cash flow are also constructed by using firm level data taken from financial statements analysis of companies. Due to the problem of endogeneity, Generalized Method of Moments (GMM) one step and two step estimation technique is applied. This study divides the firms into small and large to identify the broad credit channel and to explore the heterogeneous effects of monetary policy. This study also splits the data into pre (1974-1989) and post (1990-2010) financial sector reforms periods to test the hypothesis that whether firms’ behavior after denationalization in terms of monetary policy effects has changed or not as well as into three other different time frames ranging from 1974-1985, 1986-1997 and 1998-2010 to gauge the relative strength of the monetary policy effects on investment spending through the interest rate channel during these time frames. To explore the possibility that effects of monetary policy on firms’ investment may be different for different sectors, textile cotton, textile synthetic and chemical sectors are analyzed. Results indicate the presence of the strong interest rate and broad credit channel of monetary policy transmission in Pakistan. Firms’ investment found to be affected by the monetary policy. Small firms explored to be more responsive to the monetary tightening as compared with large firms due to greater informational asymmetries proving that monetary policy exerts heterogeneous effects. Effect of monetary policy on firms’ business fixed investment spending through the interest rate channel are greater after the financial sector reforms than the pre reform era giving strong indication of strengthening of monetary management after the reforms. During different time frames, effect of monetary policy through the interest rate channel has been different, greatest during the 1986-1997. Different sectors explored to be sensitive to monetary tightening to varying degrees and chemical sector investment discovered to be most sensitive to the monetary tightening due to capital intensive nature of its operations while the interest rate channel explored not to be operative for the textile synthetic sector. Supervisor:- Dr. Shahid Mansoor Hashmi