NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

David W. Berger, Konstantin Milbradt, Fabrice Tourre, Joseph Vavra

NBER Working Paper No. 25157
Issued in October 2018, Revised in March 2020
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w25157

 
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