DP13223 State Dependent Effects of Monetary Policy: the Refinancing Channel

Author(s): Martin Eichenbaum, Sérgio Rebelo, Arlene Wong
Publication Date: October 2018
Keyword(s): monetary policy, Mortgages, refinancing, state dependency
JEL(s): E52, G21
Programme Areas: Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13223

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. Motivated by the rapid expansion of Fintech, we study the impact of a fall in refinancing costs on the e cacy of monetary policy. Our model implies that as refinancing costs decline, the effects of monetary policy become less state dependent and more powerful.