Mortgage Prepayment and Path-dependent Effects of Monetary Policy

David Berger; Konstantin Milbradt; Fabrice Tourre; Joseph Vavra

Mortgage Prepayment and Path-dependent Effects of Monetary Policy

David 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 loanlevel 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 language	English
Publication date	2019
Number of pages	58
Publication status	Published - 2019
Event	2019 Annual Meeting of the Society for Economic Dynamics - Washington University in St. Louis and Federal Reserve Bank of St. Louis, St. Louis, United States Duration: 27 Jun 2019 → 29 Jul 2019 https://www.sed2019stlouis.org/

Conference

Conference	2019 Annual Meeting of the Society for Economic Dynamics
Location	Washington University in St. Louis and Federal Reserve Bank of St. Louis
Country/Territory	United States
City	St. Louis
Period	27/06/2019 → 29/07/2019
Internet address	https://www.sed2019stlouis.org/

Keywords

Monetary policy
Path-dependence
Refinancing
Mortgage debt

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AU - Vavra, Joseph

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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 loanlevel evidence on the relationship between prepayment 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 loanlevel evidence on the relationship between prepayment 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

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