Does the Federal Reserve Obtain Competitive and Appropriate Prices in Monetary Policy Implementation?

64 Pages Posted: 7 Aug 2020 Last revised: 17 Feb 2023

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: February 16, 2023

Abstract

Many of the Federal Reserve's (the Fed's) monetary policy operations involve trading with primary dealers. We find that, for agency MBS, dealers charge 2.5 cents (per \$100 face value) higher selling to the Fed than to non-Fed customers. Controlling for the same dealer, same security, and same trading time, this discriminatory pricing likely arises from dealers' market power rather than inventory cost. Further matching trade size reduces the price differential by more than half, implying that dealers' market power greatly relates to the Fed's purchases in large amounts, whereas the Fed's constrained counterparty choice also plays a noticeable role.

Keywords: Dealer inventory, Discriminatory pricing, Market power, MBS, Monetary policy

JEL Classification: E52, G2, D43

Suggested Citation

An, Yu and Song, Zhaogang, Does the Federal Reserve Obtain Competitive and Appropriate Prices in Monetary Policy Implementation? (February 16, 2023). Johns Hopkins Carey Business School Research Paper No. 20-05, Available at SSRN: https://ssrn.com/abstract=3654650 or http://dx.doi.org/10.2139/ssrn.3654650

Yu An (Contact Author)

Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
260
Abstract Views
1,304
Rank
196,471
PlumX Metrics