How Quantitative Easing Works: Evidence on the Refinancing Channel

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.