Download this Paper Open PDF in Browser

How Quantitative Easing Works: Evidence on the Refinancing Channel

76 Pages Posted: 9 Dec 2015 Last revised: 6 Dec 2016

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Christopher Palmer

MIT Sloan

Multiple version iconThere are 2 versions of this paper

Date Written: September 26, 2016

Abstract

Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how these programs affect the real economy. Using rich borrower-linked mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-eligible mortgage originations significantly more than the origination of GSE-ineligible mortgages. In contrast, QE2's focus on purchasing Treasuries did not have such differential effects. We find that the Fed's purchase of MBS (rather than exclusively Treasuries) during QE1 resulted in an additional $600 billion of refinancing, substantially reducing interest payments for refinancing households, leading to a boom in equity extraction, and increasing consumption by an additional $76 billion. This de facto allocation of credit across mortgage market segments, combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity between monetary policy and macroprudential housing policy. Our counterfactual simulations estimate that relaxing GSE eligibility requirements would have significantly increased refinancing activity in response to QE1, including a 20% increase in equity extraction by households. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.

Keywords: Monetary policy, MBS, quantitative easing, LSAP, Refinancing, deleveraging, HARP, GSE

JEL Classification: E20, E30, E51, G28

Suggested Citation

Di Maggio, Marco and Kermani, Amir and Palmer, Christopher, How Quantitative Easing Works: Evidence on the Refinancing Channel (September 26, 2016). Columbia Business School Research Paper No. 16-1. Available at SSRN: https://ssrn.com/abstract=2700354 or http://dx.doi.org/10.2139/ssrn.2700354

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Kermani

University of California, Berkeley ( email )

2220 Piedmont Ave
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher Palmer

MIT Sloan ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

Paper statistics

Downloads
650
rank
32,749
Abstract Views
2,525