Abstract

Applying a permanent income model with exogenous liquidity constraints and mortgage behavior, household refinancing when mortgage interest rates are historically high and rising, a persistent empirical puzzle, is explained. Using data from the Panel Study of Income Dynamics, households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25% more likely to refinance, 1991-94. On average, such liquidity-constrained households converted over two-thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted, 1991-94, producing an estimated expenditure stimulus of at least $28 billion.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 985-1014
Launched on MUSE
2005-03-22
Open Access
No
Archive Status
Archived 2007
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