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
JEL(s): E52, G21
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.