Monetary Policy Transmission in Segmented Markets

77 Pages Posted: 15 Jan 2021 Last revised: 19 Mar 2021

See all articles by Jens Eisenschmidt

Jens Eisenschmidt

European Central Bank (ECB)

Yiming Ma

Columbia University - Columbia Business School

Anthony Lee Zhang

University of Chicago - Booth School of Business

Date Written: May 15, 2020

Abstract

We show that dealer market power impedes the pass-through of monetary policy in the European repo market. The current literature has mostly centered around collateral scarcity, where scarce and heterogeneous collateral causes repo rates to fall below policy rates and diverge across collateral types. Using a dataset covering both inter-dealer and OTC repo trades, we find significant dispersion in repo rates that cannot be explained by collateral scarcity alone. We show that this is because most non-dealer and non-banks do not have access to e-trading on centralized exchanges. Instead, they rely on OTC-intermediated access to repo markets through dealer banks. As a result, dealers exhibit significant market power, which causes the pass-through of the ECB's policy rate to the large OTC segment of the market to be inefficient and unequal. Our model and estimates imply that a customer-facing secured funding facility like the Fed's RRP can alleviate dealer market power and improve the pass-through of monetary policy in repo markets.

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

JEL Classification: G20, G21, E50

Suggested Citation

Eisenschmidt, Jens and Ma, Yiming and Zhang, Anthony Lee, Monetary Policy Transmission in Segmented Markets (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3756410 or http://dx.doi.org/10.2139/ssrn.3756410

Jens Eisenschmidt

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Yiming Ma (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Anthony Lee Zhang

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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