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State Dependent Effects of Monetary Policy: the Refinancing Channel

Author

Listed:
  • Martin Eichenbaum

    (Northwestern University)

  • Sergio Rebelo

    (Northwestern University)

  • Arlene Wong

    (Princeton University)

Abstract

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 lifecycle 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.

Suggested Citation

  • Martin Eichenbaum & Sergio Rebelo & Arlene Wong, 2020. "State Dependent Effects of Monetary Policy: the Refinancing Channel," Working Papers 2020-21, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-21
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    More about this item

    Keywords

    monetary policy; state dependency; refinancing;
    All these keywords.

    JEL classification:

    • 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

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