Publication Type
Journal Article
Version
submittedVersion
Publication Date
10-2023
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 costs. 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 limited breadth of counterparty choice also plays some role.
Keywords
Dealer inventory, Discriminatory pricing, Market power, MBS, Monetary policy
Discipline
Finance | Finance and Financial Management
Research Areas
Finance
Areas of Excellence
Growth in Asia
Publication
Review of Financial Studies
Volume
36
Issue
10
First Page
4113
Last Page
4157
ISSN
0893-9454
Identifier
10.1093/rfs/hhad032
Publisher
Oxford University Press
Citation
AN, Yu and SONG, Zhaogang.
Does the Federal Reserve obtain competitive and appropriate prices in monetary policy implementation?. (2023). Review of Financial Studies. 36, (10), 4113-4157.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7921
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
External URL
https://api.elsevier.com/content/abstract/scopus_id/85174284047
Additional URL
https://doi.org/10.1093/rfs/hhad032