State Dependent Effects of Monetary Policy: The Refinancing Channel

62 Pages Posted: 16 Oct 2018 Last revised: 8 Nov 2018

See all articles by Martin Eichenbaum

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Arlene Wong

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

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.

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Suggested Citation

Eichenbaum, Martin and Tavares Rebelo, Sergio and Wong, Arlene, State Dependent Effects of Monetary Policy: The Refinancing Channel (October 2018). NBER Working Paper No. w25152. Available at SSRN: https://ssrn.com/abstract=3266245

Martin Eichenbaum (Contact Author)

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Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Arlene Wong

Princeton University ( email )

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