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Discussion Paper
Who’s Borrowing and Lending in Repo Markets?
Repo markets play a vital role in the U.S. financial system. In this three-part series, we examine who participates in these markets, what trade-offs influence how different repo segments are structured, and why repos matter for monetary policy. Today’s post introduces repo transactions, focusing on the major private-sector participants and why they engage in these markets.
Discussion Paper
Follow the Cash! Microstructure of Repo Markets
The repo market in the U.S. is a mosaic of segments with distinct participants and various settlement and clearing practices. Why do large cash lenders typically settle their trades through a third-party agent? Why does the interdealer market clear through a central counterparty? Why do levered investors favor bilateral trades? In the second post of this series, we follow the cash as it navigates through repo markets to better understand the costs and benefits that shape the existing market structures.
Discussion Paper
The Role of Repos in Monetary Policy Implementation
In the first two posts of this three-part series, we discussed private market participants that are active in repo markets for profit-making motives. Central banks are also active repo market participants, but their reasons often differ from those of private participants. In today’s post, we discuss how central banks use repos to manage liquidity in the financial system and implement monetary policy.
Discussion Paper
Consumer Scores and Price Discrimination
The consumer suffers because she buys less (with the loss represented by the red area). And while not depicted, she also suffers from future price discrimination due to information about her willingness to pay (that is, the intercept of her demand function) getting transmitted to Firm 2. However, Firm 1 is forced to lower its price (P’ in the figure) after the strategic demand reduction occurs. If the consumer has high willingness to pay, the benefit of this discount applied to many units is such that she wants to be tracked (the blue area—a benefit—grows as the intercept of demand ...
Discussion Paper
Breaking Down the Market for Misinformation
The spread of misinformation online has been recognized as a growing social problem. In responding to the issue, social media platforms have (i) promoted the services of third-party fact-checkers; (ii) removed producers of misinformation and downgraded false content; and (iii) provided contextual information for flagged content, empowering users to determine the veracity of information for themselves. In a recent staff report, we develop a flexible model of misinformation to assess the efficacy of these types of interventions. Our analysis focuses on how well these measures incentivize users ...
Discussion Paper
Leader-Follower Dynamics in Shareholder Activism
Activist shareholders play a central role in modern corporations, influencing the capital structure, business strategy, and governance of firms. Such “blockholders” range from investors who actively jawbone or break up firms to index funds that are largely passive in that they limit themselves to voting. In between, however, is a key group of blockholders that have historically focused on trading but have embraced activism as an established business strategy in the past few decades. Campaigns involving such “trading” blockholders have become ubiquitous, increasingly targeting ...
Discussion Paper
Who’s Borrowing and Lending in the Fed Funds Market Today?
The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation.
Discussion Paper
Who Is Borrowing and Lending in the Eurodollar and Selected Deposit Markets?
A recent Liberty Street Economics post discussed who is borrowing and lending in the federal funds (fed funds) market. This post explores activity in two other markets for short-term bank liabilities that are often perceived as close substitutes for fed funds—the markets for Eurodollars and “selected deposits.”
Discussion Paper
The Central Banking Beauty Contest
Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between (i) a monetary authority that cannot commit to an inflation target and (ii) a set of market participants that understand the incentives created by that credibility problem. In this post, we describe the game, a ...
Discussion Paper
Nonbanks and Banks: Alone or Together?
Nonbank financial institutions (NBFIs) constitute a variety of entities—fintech companies, mutual funds, hedge funds, insurance companies, private debt providers, special purpose vehicles, among others—that have become important providers of financial intermediation services worldwide. But what is the essence of nonbank financial intermediation? Does it have any inherent advantages, and how does it interact with that performed by banks? In this Liberty Street Economics post, which is based on our recent staff report, we provide a model-based survey of recent literature on nonbank ...