DP12623 | Intermediation markups and monetary policy pass-through

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We introduce intermediation frictions into the classical monetary model with fully flexible prices. In our model, monetary policy is redistributive because it a affects intermediaries' ability to extract rents. 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"). When the Central Bank Put is too weak, balance sheet policies become inefficient. When the Central Bank Put is very strong, however, monetary policy may be destabilizing and lead to greater frequency of market tantrums.