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

Elliot Anenberg, Tess C. Scharlemann and Eileen van Straelen
Additional contact information
Elliot Anenberg: https://www.federalreserve.gov/econres/elliot-anenberg.htm
Tess C. Scharlemann: https://www.federalreserve.gov/econres/tess-c-scharlemann.htm
Eileen van Straelen: https://www.federalreserve.gov/econres/eileen-van-straelen.htm

No 2023-073, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Equity extraction; Mortgages and credit; Cash out refinancing; Monetary policy; Refinancing (search for similar items in EconPapers)
JEL-codes: G51 (search for similar items in EconPapers)
Pages: 62 p.
Date: 2023-11-21
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2023073pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-73

DOI: 10.17016/FEDS.2023.073

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().