DP13223 State Dependent Effects of Monetary Policy: the Refinancing Channel
|Author(s):||Martin Eichenbaum, Sérgio Rebelo, Arlene Wong|
|Publication Date:||October 2018|
|Date Revised:||September 2020|
|Keyword(s):||monetary policy, Mortgages, refinancing, state dependency|
|Programme Areas:||Monetary Economics and Fluctuations, Macroeconomics and Growth|
|Link to this Page:||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 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.