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Borrowing and Spending in the Money: Debt Substitution and the Cash-out Refinance Channel of Monetary Policy

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Abstract

We show that the strong negative effect of higher mortgage rates on cash-out refinancing reflects substitution into other borrowing products, not large changes in total new household borrowing. We exploit an exogenous increase in long-term rates to show that, in the cross-section of outstanding mortgage rates, changes in cash-out and alternative borrowing are offsetting. Additionally, we instrument using monetary policy surprises to show that, over the period from 2006-2021, changes in cash-out refinancing are offset by alternative borrowing. Our results suggest that debt substitution substantially weakens the cash-out refinance channel of monetary policy and reduces its path-dependence.

Suggested Citation

  • Elliot Anenberg & Tess C. Scharlemann & Eileen van Straelen, 2023. "Borrowing and Spending in the Money: Debt Substitution and the Cash-out Refinance Channel of Monetary Policy," Finance and Economics Discussion Series 2023-073, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2023-73
    DOI: 10.17016/FEDS.2023.073
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    References listed on IDEAS

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    1. Bu, Chunya & Rogers, John & Wu, Wenbin, 2021. "A unified measure of Fed monetary policy shocks," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 331-349.
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    More about this item

    Keywords

    Equity extraction; Mortgages and credit; Cash out refinancing; Monetary policy; Refinancing;
    All these keywords.

    JEL classification:

    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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