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Monetary policy transmission in segmented markets

Author

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  • Eisenschmidt, Jens
  • Ma, Yiming
  • Zhang, Anthony Lee

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 the majority of non-dealer banks and non-banks is inefficient and unequal in repo markets. Our estimates imply that a secured funding facility like the Fed’s RRP may alleviate dealer market power and improve the transmission efficiency of monetary policy to banks and non-bank financial institutions. JEL Classification: E4, E5, G2

Suggested Citation

  • Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2022. "Monetary policy transmission in segmented markets," Working Paper Series 2706, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222706
    Note: 2696070
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    References listed on IDEAS

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    Cited by:

    1. Michala Marcussen, 2022. "Euro Conditionality Hinges on Positive Convergence," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(5), pages 288-292, September.
    2. Niu, Xiaoxiao & Harvey, Nigel, 2023. "Are lay expectations of inflation based on recall of specific prices? If so, how and under what conditions?," Journal of Economic Psychology, Elsevier, vol. 98(C).
    3. Benoit Nguyen & Davide Tomio & Miklos Vari, 2023. "Safe Asset Scarcity and Monetary Policy Transmission," Working papers 934, Banque de France.

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    More about this item

    Keywords

    market power; monetary policy; non-banks; pass-through efficiency; repo market;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services

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