NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Fabrice Tourre

Finance Department
Copenhagen Business School
Campus Solbjerg Plads 3 - A4.01
2000 Frederiksberg
Denmark

E-Mail: ft.fi@cbs.dk
Institutional Affiliation: Copenhagen Business School

NBER Working Papers and Publications

October 2018Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
with David W. Berger, Konstantin Milbradt, Joseph Vavra: w25157
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 stimulus.
 
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