Title

State Dependent Effects of Monetary Policy: the Refinancing Channel

Author(s)

Martin Eichenbaum Martin Eichenbaum (Northwestern University)

Sergio Rebelo Sergio Rebelo (Northwestern University)

Arlene Wong Arlene Wong (Princeton University)

Abstract

This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic lifecycle model that accounts for our findings and use it to study how the response of consumption to a change in mortgage rates depends on the distribution of savings from refinancing. These effects are strongly state dependent. We also use the model to study the impact of a long period of low interest rates on the potency of monetary policy. We find that this potency is substantially reduced both during the period and for a substantial amount of time after interest rates renormalize.

Creation Date

2020-08

Section URL ID

Paper Number

2020-21

URL

https://static1.squarespace.com/static/576576adbe659449f97e0d35/t/60770ba1f7ec7e67afa4b801/1618414500249/refinance.pdf

File Function

Jel

E52, G21

Keyword(s)

monetary policy, state dependency, refinancing

Suppress

false

Series

13