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

54 Pages Posted: 7 Aug 2020 Last revised: 29 Apr 2022

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: July 18, 2020

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 cents (per $100 face value) higher selling to the Fed than to non-Fed customers. Controlling the same dealer, same security, and same trading time, this discriminatory pricing arises likely from dealers' market power rather than inventory cost. Further controlling the same trade size reduces the price differential considerably, implying that dealers' market power mainly relates to the Fed's rapid purchases in large amounts, though the Fed’s limited counterparty choice (primary dealers exclusively) also plays some 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 Implementations? (July 18, 2020). 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

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