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Asymmetric Mortgage Channel of Monetary Policy: Refinancing as a Call Option

Author

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  • Sangyup Choi
  • Kimoon Jeong
  • Jiseob Kim

Abstract

We study how the call option-like refinancing structure can affect the transmission channel of monetary policy on consumption. Utilizing European data, we find that contractionary shocks induce a larger decline in consumption in countries with a higher share of adjustable-rate mortgages (ARMs), confirming the well-known finding. In contrast, consumption responses to expansionary shocks do not depend on this share, resulting in the asymmetric mortgage channel that has not been documented. Household-level microdata and quantitative analysis indicate that refinancing in response to a decline in the interest rate—akin to exercising call options—is the key to rationalizing our findings.

Suggested Citation

  • Sangyup Choi & Kimoon Jeong & Jiseob Kim, 2025. "Asymmetric Mortgage Channel of Monetary Policy: Refinancing as a Call Option," CAMA Working Papers 2025-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2025-02
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    File URL: https://crawford-prod.anu.edu.au/sites/default/files/2025-01/02_2025_Choi_Jeong_Kim.pdf
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    Keywords

    adjustable-rate mortgages; refinancing; monetary policy; consumption; call option;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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