Economics Webinar - Asymmetric Mortgage Channel of Monetary Policy: Refinancing as a Call Option

We study how the call option-like mortgage refinancing structure can generate sign-dependent effects of monetary policy shocks on consumption. Utilizing European data, we find that contractionary shocks induce a larger decline in consumption in countries with a higher share of adjustable-rate mortgages (ARMs), consistent with the existing literature. In contrast, consumption responses to expansionary shocks do not depend on this share, resulting in asymmetry that has not been documented. Household-level microdata and quantitative analysis indicate that refinancing in response to a decline in the interest rate—akin to exercising call options—is the key to rationalizing our findings.