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

This paper examines how the call option-like mortgage refinancing structure can generate sign-dependent effects of monetary policy shocks on consumption. Utilizing European data, we confirm that consumption declines more significantly with a higher share of adjustable-rate mortgages (ARMs) in response to contractionary monetary policy shocks. However, we uncover that consumption does not necessarily increase more in response to expansionary shocks in the same countries, resulting in asymmetry. Both household-level microdata and model-based quantitative analysis indicate that refinancing in response to a decline in the interest rate—akin to exercising call options—is the key to rationalizing the asymmetric responses between monetary tightening and easing. Since the incentive to refinance heavily depends on its exercising cost, this mechanism is ineffective in economies where the refinancing cost is high.