Unlocking auction efficiency: a deep dive into Federal Reserve's MBS auction mechanisms
image: Note(s): This figure demonstrates the estimation results by plotting the estimated marginal cost curve, along with the observed bidding curve, for a particular dealer in one particular auction Source(s): Authors’ own creation/work
Credit: Pietro Bonadi，Ali Hotacsu，Zhaogang Song.
A groundbreaking study published in CFRI titled "An empirical test of auction efficiency: Evidence from MBS auctions of the Federal Reserve" provides a comprehensive analysis of the efficiency of different auction mechanisms used by the Federal Reserve in its mortgage-backed securities (MBS) purchases. Authored by Pietro Bonadi (Carnegie Mellon University), Ali Hortacsu (University of Chicago), and Zhaogang Song (Johns Hopkins University), the study leverages detailed bidding data from 2014 to evaluate the performance of discriminatory price auctions, uniform price auctions, and Vickrey auctions.
The research focuses on the Federal Reserve’s MBS auctions conducted via the FedTrade platform, a critical tool in the Fed’s monetary policy toolkit since the 2008 financial crisis. The study reveals that while discriminatory price auctions, the current standard, do not significantly differ from uniform price auctions in terms of the Fed’s net expenditures, Vickrey auctions demonstrate superior allocative efficiency, reducing inefficiencies by an average of 0.74% of dealer surplus.
By employing a structural model and counterfactual analysis, the authors provide the first empirical assessment of the Fed’s auction mechanisms, addressing a significant gap in the literature. Their findings offer valuable insights for policymakers and practitioners, suggesting that Vickrey auctions could enhance efficiency in complex, multi-unit auction settings.
This study not only advances auction theory but also provides practical implications for the design and implementation of monetary policy tools, particularly in the context of large-scale asset purchase programs. For further details, the full article is available in CFRI.
Key Findings:
- Discriminatory price auctions and uniform price auctions yield similar net expenditures for the Federal Reserve.
- Vickrey auctions outperform discriminatory price auctions in allocative efficiency, reducing inefficiencies by 0.74% on average.
The study provides the first structural analysis of the Fed’s MBS auctions, offering new insights into auction design and monetary policy implementation.