State Dependent Effects of Monetary Policy: the Refinancing Channel
NBER Working Paper No. 25152
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 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.
Document Object Identifier (DOI): 10.3386/w25152