Mortgage prepayment and path-dependent effects of monetary policy

Journal Article (Journal Article)

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.

Full Text

Duke Authors

Cited Authors

  • Berger, D; Milbradt, K; Tourre, F; Vavra, J

Published Date

  • September 1, 2021

Published In

Volume / Issue

  • 111 / 9

Start / End Page

  • 2829 - 2878

Electronic International Standard Serial Number (EISSN)

  • 1944-7981

International Standard Serial Number (ISSN)

  • 0002-8282

Digital Object Identifier (DOI)

  • 10.1257/aer.20181857

Citation Source

  • Scopus