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How Do the Fed's MBS Purchases Affect Credit Allocation?

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Abstract

It is sometimes said that the Federal Reserve should not engage in “credit allocation.” But what does credit allocation actually mean? And how do current Fed policies affect the allocation of credit? In this post, we describe two separate ideas often associated with credit allocation. The first idea is that the Fed should not take credit risk, which taxpayers would ultimately have to bear. The second idea is that the Fed’s actions should not influence the flow of credit to particular sectors. We consider whether the Fed’s holdings of agency mortgage-backed securities (MBS) could affect the allocation of credit. In a companion post, we discuss how the economic effects of the Fed’s MBS holdings compare with the economic effects of more traditional holdings.

Suggested Citation

  • Antoine Martin & Sam Schulhofer-Wohl, 2018. "How Do the Fed's MBS Purchases Affect Credit Allocation?," Liberty Street Economics 20180806, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87267
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    More about this item

    Keywords

    credit allocation; MBS; asset purchases;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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