Mortgage Prepayment and Path-Dependent Effects of Monetary Policy | Zendy

David Berger | Zendy; Konstantin Milbradt | Zendy; Fabrice Tourre | Zendy; Joseph Vavra | Zendy

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Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

Author(s) -

David Berger,

Konstantin Milbradt,

Fabrice Tourre,

Joseph Vavra

Publication year - 2021

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20181857

Subject(s) - prepayment of loan , economics , interest rate , monetary policy , monetary economics , floating interest rate , debt , loan , fixed interest rate loan , incentive , macroeconomics , microeconomics , finance

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 E32, E43, E52, E58, G21, G51)

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