Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

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

Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

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

Department of Finance

Research output: Contribution to conference › Paper › Research › peer-review

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 repayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus.

Original language	English
Publication date	2019
Number of pages	58
Publication status	Published - 2019
Event	Consumer Finance: Micro and Macro Approaches - Becker Friedman Institute, University of Chicago, Chicago, United States Duration: 10 May 2019 → 11 May 2019 https://bfi.uchicago.edu/event/consumer-finance-micro-and-macro-approaches/

Conference

Conference	Consumer Finance: Micro and Macro Approaches
Location	Becker Friedman Institute, University of Chicago
Country/Territory	United States
City	Chicago
Period	10/05/2019 → 11/05/2019
Internet address	https://bfi.uchicago.edu/event/consumer-finance-micro-and-macro-approaches/

Keywords

Monetary policy
Path-dependence
Refinancing
Mortgage debt

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Cite this

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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 repayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus.",

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AU - Berger, David W.

AU - Milbradt, Konstantin

AU - Tourre, Fabrice

AU - Vavra, Joseph

PY - 2019

Y1 - 2019

N2 - 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 repayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus.

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 repayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus.

KW - Monetary policy

KW - Path-dependence

KW - Refinancing

KW - Mortgage debt

KW - Monetary policy

KW - Path-dependence

KW - Refinancing

KW - Mortgage debt

M3 - Paper

T2 - Consumer Finance: Micro and Macro Approaches

Y2 - 10 May 2019 through 11 May 2019

ER -