Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
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 stimulus.
We would like to thank Daojing Zhai, Ariza Gusti and Yang Zhang for excellent research assistance. We would also like to thank our discussants Dan Greenwald, Monika Piazzesi, Deeksha Gupta, and Ben Keys as well as Erik Hurst, Andreas Fuster, Pascal Noel, Amir Sufi, Amit Seru, Sam Hanson, Gadi Barlevy, Anil Kashyap, Arlene Wong, Greg Kaplan, Adi Sunderam, Tom Winberry, and seminar participants at NYU, NBER ME, Duke, Northwestern Housing and Macro Conference, the ECB, Arizona State, the Chicago Fed, Marquette, Copenhagen Business School, EIEF, University of Munich, the Bank of Canada, the Philadelphia Fed, the AEA, NBER Summer Institute, Stanford GSB, FRB-NY Fed Workshop, SED, BFI, Notre Dame and Berkeley as well as helpful comments from referees and the editor. This research was supported by the Institute for Global Markets and the Fama-Miller Center at the University of Chicago Booth School of Business, and the Guthrie Center for Real Estate Research at Kellogg. Fabrice Tourre is also affiliated with the Danish Finance Institute and kindly acknowledges its financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
David Berger & Konstantin Milbradt & Fabrice Tourre & Joseph Vavra, 2021. "Mortgage Prepayment and Path-Dependent Effects of Monetary Policy," American Economic Review, American Economic Association, vol. 111(9), pages 2829-2878, September. citation courtesy of