Discussion paper

DP18813 Money Market Funds and the Pricing of Near-Money Assets

We introduce a new channel through which US money market funds (MMFs) affect the pricing of near-money assets and measured convenience yields. Our theoretical model reveals that MMFs' strategic interactions create frictions that are exacerbated by T-bill market illiquidity. Using instrumental variables, we show that MMFs have an economically significant price impact in the T-bill market. Consistent with strategic behavior, they internalize this price impact when setting repo rates and allocating portfolios. Our evidence suggests that these frictions drive a sizeable part of common measures of T-bill convenience yields. Our results have implications for monetary policy transmission, government debt issuance, and the regulation of MMFs. T-bills, repo, money market funds, near-money assets, liquidity, convenience yield


Doerr, S, E Eren and S Malamud (2024), ‘DP18813 Money Market Funds and the Pricing of Near-Money Assets‘, CEPR Discussion Paper No. 18813. CEPR Press, Paris & London. https://cepr.org/publications/dp18813