https://macropaperwarehouse.com/authors/elliot-anenberg/Elliot AnenbergHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/borrowing-and-spending-in-the-money-debt-substitution-and-the-cash-out-refinance-channel-of-monetary-policy/https://macropaperwarehouse.com/papers/borrowing-and-spending-in-the-money-debt-substitution-and-the-cash-out-refinance-channel-of-monetary-policy/<p><strong>Research Question.</strong> Does monetary policy stimulate household borrowing and consumption by enabling cash-out mortgage refinancing (&ldquo;the cash-out refinance channel&rdquo;), or does it primarily induce substitution across borrowing products without meaningfully changing total new household borrowing?</p> <p><strong>Motivation.</strong> Prior work (Eichenbaum, Rebelo and Wong 2022; Berger et al. 2021) interprets the strong positive correlation between a borrower&rsquo;s refinance incentive and cash-out refinancing as evidence of a potent, path-dependent monetary policy transmission channel: when rates fall below a borrower&rsquo;s outstanding mortgage rate (&ldquo;in-the-money&rdquo;), the incentive to refinance generates large cash-out activity and consumption. This interpretation presumes that mortgages are effectively the only household borrowing product and that cash-out refinancing reflects a stimulated demand for new borrowing.</p>