Refinancing and the Transmission of Monetary Policy to Consumption

This paper examines the role of refinancing channel and the mortgage market structure for the transmission of monetary policy to consumption. First, I document heterogeneous consumption responses to monetary policy shocks. I find a large consumption response for homeowners who refinance or enter new loans, which is concentrated among younger people. Second, I develop a life-cycle model with fixed rate mortgages that explains these facts. Moving from a fixed to a variable-rate mortgage structure reduces the heterogeneous effects of monetary policy on consumption by age. At the same time, the aggregate effects of monetary policy on consumption is increased substantially.