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

Sangyup Choi, Kimoon Jeong and Jiseob Kim

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We study how the call option-like refinancing structure can affect the transmission channel of monetary policy on consumption. Utilizing European data, we find that contractionary shocks induce a larger decline in consumption in countries with a higher share of adjustable-rate mortgages (ARMs), confirming the well-known finding. In contrast, consumption responses to expansionary shocks do not depend on this share, resulting in the asymmetric mortgage channel that has not been documented. Household-level microdata and quantitative analysis indicate that refinancing in response to a decline in the interest rate—akin to exercising call options—is the key to rationalizing our findings.

Keywords: adjustable-rate mortgages; refinancing; monetary policy; consumption; call option (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 E52 G21 G51 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2025-01
New Economics Papers: this item is included in nep-mac and nep-mon
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https://crawford-prod.anu.edu.au/sites/default/fil ... 5_Choi_Jeong_Kim.pdf

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Working Paper: Asymmetric Mortgage Channel of Monetary Policy: Refinancing as a Call Option (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-02

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