Intermediation Markups and Monetary Policy Passthrough
61 Pages Posted: 14 Dec 2016 Last revised: 1 Oct 2017
Date Written: September 30, 2017
We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets occurs through intermediaries who bargain over a full set of state-contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents. This opens up a new transmission channel to rates in the wider economy. We find that the pass-through efficiency of quantitative easing (QE) and tightening (QT) policies depends crucially on the anticipated relationship between future monetary policy and future stock market returns (the 'Central Bank Put').
The strength of the Central Bank Put affects the room for maneuver in monetary policy: If it is too weak, balance sheet policies become inefficient. When the Central Bank Put is very strong, however, monetary policy may even be destabilizing and lead to greater frequency of market tantrums.
Keywords: Monetary Policy, Stock Returns, Intermediation, Market Frictions
JEL Classification: G12, E52, E40, E44
Suggested Citation: Suggested Citation