Kian Samaee

In the US, half of all mortgage borrowers consider only one lender when refinancing. We investigate how statistical discrimination by lenders, a tool that separates borrowers who differ in search intensity, affects welfare and monetary policy transmission to consumption. We build and calibrate a general equilibrium model of the mortgage market with two types of borrowers who differ in the number of lenders they meet. Statistical discrimination based on the relative mass of the two types at any observable current mortgage rate and home equity level results in relatively higher offer rates for non-shoppers. Higher offer rates reduce the incentive to refinance. Repeated refinancing increases the separation between the two types, reinforcing the mechanism. Statistical discrimination carries a significant welfare cost ($3,300) for a borrower, accounting for two-thirds of the total difference in welfare between the two types. Two ways of increasing mortgage search, an explicit goal of the CFPB, have opposite effects on welfare. If every third non-shopper meets one more lender, the welfare cost becomes two-thirds. However, this cost quadruples if, instead, every shopper meets one more lender. Statistical discrimination halves non-shoppers’ consumption response to a monetary policy shock but does not increase shoppers’ response. Thus, it reduces aggregate consumption response by a third. Hence, the subtle ability to statistically discriminate is highly relevant for policymaking.

How does the banking sector respond to a change in discount window rate while shadow banking coexists with a regulated banking sector? This paper studies a dynamic equilibrium model in which banks and shadow banks provide illiquid loans by issuing short-term bonds. Banks have access to the discount window to manage the liquidity risk while regulated by the liquidity requirement. Shadow banks face the same risk, but they can only manage the liquidity shock by investing enough in the safe assets. Changing the discount window rate changes the relative advantage of banks compared to shadow banks, in terms of having access to the discount window. Depending on the size of the shadow banking system, effectiveness of the role of federal reserve in changing the overnight rates may be dampened as shadow banks and banks can become interchangeable.