Working Paper: CEPR ID: DP13223
Authors: Martin Eichenbaum; Sergio Rebelo; Arlene Wong
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; state dependency; refinancing
JEL Codes: E52; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy state dependence (E19) | Consumption response (D12) |
| 25 basis point drop in mortgage rates (E43) | Consumption (E21) |
| Prolonged low interest rates (E43) | Diminished effectiveness of monetary policy (E49) |