Working Paper: CEPR ID: DP12623
Authors: Semyon Malamud; Andreas Schrimpf
Abstract: 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.
Keywords: monetary policy; stock returns; intermediation; market frictions
JEL Codes: G12; E52; E40; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Intermediaries' ability to extract rents (D43) |
| Intermediaries' ability to extract rents (D43) | Pass-through efficiency of QE and QT policies (C54) |
| Monetary policy (E52) | Pass-through efficiency of QE and QT policies (C54) |
| Central bank's put option strength (E58) | Monetary policy effectiveness in stimulating the economy (E52) |
| Monetary policy effectiveness in stimulating the economy (E52) | Economic stability (E60) |