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.
|Place of Publication||Cambridge, MA|
|Publisher||National Bureau of Economic Research (NBER)|
|Number of pages||58|
|Publication status||Published - 2018|
|Series||National Bureau of Economic Research. Working Paper Series|
Berger, D. W., Milbradt, K., Tourre, F., & Vavra, J. (2018). Mortgage Prepayment and Path-dependent Effects of Monetary Policy. National Bureau of Economic Research (NBER). National Bureau of Economic Research. Working Paper Series, No. 25157 https://doi.org/10.3386/w25157