This paper uses a two‐country VAR approach to study the transmission of monetary policy shocks in Portugal, focusing in particular on the financial decisions of households, corporations (financial/non‐financial), the government and the rest of the world. We find that a monetary policy shock has a contractionary effect on economic activity and increases the financing needs of households and non‐financial corporations. The financial sector plays an important role, supplying the necessary funds to these sectors and thus facilitating their adjustment to the shock. We do not find much evidence of a significant systematic behaviour of the government or the rest of the world in response to monetary policy shocks. Copyright © 2012 John Wiley & Sons, Ltd.