State Dependent Effects of Monetary Policy: The Refinancing Channel

73 Pages Posted: 8 Oct 2018 Last revised: 21 Sep 2020

See all articles by Martin Eichenbaum

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Arlene Wong

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

Abstract

This paper studies how the impact of monetary policy depends on the dis- tribution 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 life-cycle 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.

Keywords: monetary policy, Mortgages, refinancing, state dependency

JEL Classification: E52, G21

Suggested Citation

Eichenbaum, Martin and Tavares Rebelo, Sergio and Wong, Arlene, State Dependent Effects of Monetary Policy: The Refinancing Channel (October 2018). CEPR Discussion Paper No. DP13223, Available at SSRN: https://ssrn.com/abstract=3262548

Martin Eichenbaum (Contact Author)

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Arlene Wong

Princeton University ( email )

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Princeton, NJ 08544-0708
United States

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