Regional Heterogeneity and the Refinancing Channel of Monetary Policy
73 Pages Posted: 19 Jun 2015 Last revised: 18 Mar 2018
Date Written: March 1, 2018
We argue that the time-varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing. Using detailed loan-level data, we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts but that these effects vary over time with changes in the regional distribution of house price growth. We then build a heterogeneous household model of refinancing with both mortgage borrowers and lenders and use it to explore the aggregate implications for monetary policy arising from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.
Keywords: monetary policy, regional inequality, quantitative easing, mortgage refinancing
JEL Classification: E21, E52, G21
Suggested Citation: Suggested Citation