Copenhagen Business School
Campus Solbjerg Plads 3 - A4.01
Institutional Affiliation: Copenhagen Business School
NBER Working Papers and Publications
|October 2018||Mortgage Prepayment and Path-Dependent Effects of Monetary Policy|
with , , : 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.