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

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Listed:
  • Yu AnCarey
  • Zhaogang Song
  • Ralph Koijen

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.

Suggested Citation

  • Yu AnCarey & Zhaogang Song & Ralph Koijen, 2023. "Does the Federal Reserve Obtain Competitive and Appropriate Prices in Monetary Policy Implementation?," The Review of Financial Studies, Society for Financial Studies, vol. 36(10), pages 4113-4157.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:10:p:4113-4157.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad032
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G2 - Financial Economics - - Financial Institutions and Services
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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