Research

This paper studies how endogenous mortgage choice and refinancing affects the transmission of monetary policy to consumption in the U.S. First, I document heterogeneous mortgage choices and refinancing behavior along the wealth distribution. Second, to explain these facts, I introduce endogenous refinancing and mortgage choice between fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs) into a standard heterogeneous-agent consumption-savings model. The model reveals new channels through which the mortgage market structure affects monetary policy transmission. I find that (i) expansionary monetary policy diminishes the effectiveness of future monetary policy by reducing the share of ARMs in the economy, and (ii) the refinancing option shapes mortgage choice, reducing the aggregate transmission of monetary policy to consumption by decreasing the market share of ARMs from about 30% to 11%, while increasing its transmission to low-wealth households. These findings have implications for policies targeting refinancing costs.