Monetary Policy Transmission in Segmented Markets

Abstract

We show that dealer market power impedes the pass-through of monetary policy in repo markets, which is an important first stage of monetary policy transmission. In the European repo market, most participants do not have access to trade on centralized exchanges. Rather, they rely on OTC intermediation by a small number of dealers that exhibit significant market power. As a result, the passthrough of the ECB's policy rate to repo markets is inefficient and unequal. Our estimates imply that a secured funding facility like the Fed's RRP can alleviate dealer market power and improve the transmission efficiency of monetary policy.

Keywords: monetary policy, pass-through efficiency, repo market, market power

JEL Classification: G20, G21, E50