Mortgage Prepayment and Path-dependent Effects of Monetary Policy

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

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

116 Downloads (Pure)


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
JournalAmerican Economic Review
Issue number9
Pages (from-to)2829-2878
Number of pages50
Publication statusPublished - Sept 2021

Cite this