How Quantitative Easing Works: Evidence on the Refinancing Channel

Abstract

We document the transmission of large-scale asset purchases by the Federal Reserve to the real economy using rich borrower-linked mortgage-market data and an identification strategy based on mortgage market segmentation. We find that central bank QE1 MBS purchases substantially increased refinancing activity, reduced interest payments for refinancing households, led to a boom in equity extraction, and increased aggregate consumption. Relative to QE-ineligible jumbo mortgages, QE-eligible conforming mortgage interest rates fell by an additional 40 bp and refinancing volumes increased by an additional 56% during QE1. We estimate that households refinancing during QE1 increased their durable consumption by 12%. Our results highlight that the transmission of unconventional monetary policy to the real economy depends crucially on the composition of assets purchased and the degree of segmentation in the market.

Employment Effects of Unconventional Monetary Policy: Evidence from QE

“…However, when controlling for local demand, the effect becomes weaker in its magnitude, in particular for GSE-conforming mortgages, but remains statistically significant. We interpret this as evidence that the increase in refinancing activity after QE1 is partially driven by increased credit supply, complementary to the findings by Di Maggio et al (2016) and Beraja et al (2018), who emphasize the demand of households to refinance mortgages after QE1.…”

“…In addition, we find that, within the mortgage market, QE1 mainly affected the refinancing volume of existing mortgages (Di Maggio et al, 2016;Beraja et al, 2018), and QE3 affected the origination of home purchase mortgages at more exposed banks. Within the C&I loan market, only QE3 increased lending, in particular in to smaller firms.…”

“…Our study is the first to document a link between the Federal Reserve's quantitative easing (QE) and employment outcomes. This is a particularly important finding as previous research has highlighted an effect of QE on bank lending (Darmouni and Rodnyansky, 2017), and an effect of QE on household net-worth and consumption via the mortgage market (Di Maggio et al, 2016;Beraja et al, 2018), but has not been able to speak to the crucial question of its effect on improving broader economic conditions such as employment outcomes.…”

“…Previous studies on the effect of unconventional monetary policy in the United States have mostly focused on outcomes other than employment. For instance, recent studies have investigated the effects of QE on aggregate financing cost (Hancock and Passmore, 2011;Gilchrist et al, 2015) or on outcomes in the housing market and at the household level (Di Maggio et al, 2016;Beraja et al, 2018), at the bank level (Darmouni and Rodnyansky, 2017;Kurtzman et al, 2017), or at the firm level (Foley-Fisher et al, 2016;Chakraborty et al, 2016). 4 Our analysis of bank lending is closely related to Darmouni and Rodnyansky (2017) and Di Maggio et al (2016), who exploit cross-sectional variation in MBS holdings.…”

How Did Unconventional Monetary Policy Affect Economic Forecasts?

“…Luck and Zimmermann (2018) report that some QE programs enhanced employment by encouraging bank lending. In a similar vein, Di Maggio, Kermani, and Palmer (2016) find that Fed purchases of mortgages during QE1 increased U.S. consumption by increasing refinance origination and equity extraction whereas QE2 involving Fed purchases of government securities did not. Reis (2016) argues that although QE1 affected expected inflation, later QE announcements did not because Fed asset purchase programs had already saturated the market for reserves.…”