Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

David Berger, Konstantin Milbradt, Fabrice Tourre and Joseph Vavra

American Economic Review, 2021, vol. 111, issue 9, 2829-78

Abstract: How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not just on their current level but also on their previous path. Using a household model of mortgage prepayment matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimuli.

JEL-codes: E32 E43 E52 E58 G21 G51 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Mortgage Prepayment and Path-Dependent Effects of Monetary Policy (2019)
Working Paper: Mortgage Prepayment and Path-Dependent Effects of Monetary Policy (2018)
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DOI: 10.1257/aer.20181857

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