Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
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.
Konstantin Milbradt, David Berger, Joe Vavra, Fabrice Tourre
Milbradt, Konstantin, David Berger, Joe Vavra, and Fabrice Tourre. 2018. Mortgage Prepayment and Path-Dependent Effects of Monetary Policy.