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Mortgage-rate pass-through in the presence of refinancing

Author

Listed:
  • David Berger

    (Northwestern University)

  • Fabrice Tourre

    (Northwestern University)

  • Konstantin Milbradt

    (Northwestern University)

Abstract

We present an analytically tractable model of the mortgage-rate pass through and the cross-section of coupon rates in the economy. Competitive banks offer downward adjustable fixed-rate risk-free mortgages (“refinancing”) with current mortgage rate m(r) where r is the prevailing short-rate the bank uses to finance the mortgage. We present two versions: (1) Rational attentive investors facing small adjustment cost refinance as soon as the current mortgage rate is below their individual mortgage rate; (2) rational inattentive consumers facing small adjustment cost refinance as soon as they become aware of the current mortgage rate being below their individual mortgage rate. We analytically derive m(r) for general processes and the ergodic distribution of mortgage rates in the economy. The mortgage rate function m(r) is increasing and additionally concave. Thus, monetary policy has a differential impact on the housing market depending on the level of the interest rate r. Further, the mortgage pass-through is affected by default risk, financial literacy, and the competitiveness of the banking industry.

Suggested Citation

  • David Berger & Fabrice Tourre & Konstantin Milbradt, 2018. "Mortgage-rate pass-through in the presence of refinancing," 2018 Meeting Papers 1097, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1097
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    Cited by:

    1. Slacalek, Jiri & Tristani, Oreste & Violante, Giovanni L., 2020. "Household balance sheet channels of monetary policy: A back of the envelope calculation for the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).

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