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Discussion Paper Details

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Title: State Dependent Effects of Monetary Policy: the Refinancing Channel

Author(s): Martin Eichenbaum, Sérgio Rebelo and Arlene Wong

Publication Date: October 2018

Keyword(s): monetary policy, Mortgages, refinancing and state dependency

Programme Area(s): Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: This paper studies how the impact of monetary policy depends on the dis- tribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic life-cycle model that accounts for our findings and use it to study how the response of consumption to a change in mortgage rates depends on the distribution of savings from refinancing. These effects are strongly state dependent. We also use the model to study the impact of a long period of low interest rates on the potency of monetary policy. We find that this potency is substantially reduced both during the period and for a substantial amount of time after interest rates renormalize.

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Bibliographic Reference

Eichenbaum, M, Rebelo, S and Wong, A. 2018. 'State Dependent Effects of Monetary Policy: the Refinancing Channel'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13223