Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
American Economic Review
vol. 111,
no. 9, September 2021
(pp. 2829-78)
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 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 stimuli.Citation
Berger, David, Konstantin Milbradt, Fabrice Tourre, and Joseph Vavra. 2021. "Mortgage Prepayment and Path-Dependent Effects of Monetary Policy." American Economic Review, 111 (9): 2829-78. DOI: 10.1257/aer.20181857Additional Materials
JEL Classification
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth