Mortgage Prepayment and Path-dependent Effects of Monetary Policy

David W. Berger, Konstantin Milbradt, Fabrice Tourre, Joseph Vavra

Research output: Working paperResearch

Abstract

How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not just on their current level but also on their previous path. Using a household model of mortgage prepayment matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus.
Original languageEnglish
Place of PublicationCambridge, MA
PublisherNational Bureau of Economic Research (NBER)
Number of pages58
DOIs
Publication statusPublished - 2018
SeriesNational Bureau of Economic Research. Working Paper Series
Number25157
ISSN0898-2937

Cite this

Berger, D. W., Milbradt, K., Tourre, F., & Vavra, J. (2018). Mortgage Prepayment and Path-dependent Effects of Monetary Policy. Cambridge, MA: National Bureau of Economic Research (NBER). National Bureau of Economic Research. Working Paper Series, No. 25157 https://doi.org/10.3386/w25157
Berger, David W. ; Milbradt, Konstantin ; Tourre, Fabrice ; Vavra, Joseph. / Mortgage Prepayment and Path-dependent Effects of Monetary Policy. Cambridge, MA : National Bureau of Economic Research (NBER), 2018. (National Bureau of Economic Research. Working Paper Series; No. 25157).
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Berger, DW, Milbradt, K, Tourre, F & Vavra, J 2018 'Mortgage Prepayment and Path-dependent Effects of Monetary Policy' National Bureau of Economic Research (NBER), Cambridge, MA. https://doi.org/10.3386/w25157

Mortgage Prepayment and Path-dependent Effects of Monetary Policy. / Berger, David W.; Milbradt, Konstantin; Tourre, Fabrice; Vavra, Joseph.

Cambridge, MA : National Bureau of Economic Research (NBER), 2018.

Research output: Working paperResearch

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AB - How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not just on their current level but also on their previous path. Using a household model of mortgage prepayment matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus.

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Berger DW, Milbradt K, Tourre F, Vavra J. Mortgage Prepayment and Path-dependent Effects of Monetary Policy. Cambridge, MA: National Bureau of Economic Research (NBER). 2018. https://doi.org/10.3386/w25157