How Quantitative Easing Works: Evidence on the Refinancing Channel

Marco  Di Maggio; Amir  Kermani; Christopher  Palmer

Article | Review of Economic Studies | May 2020

How Quantitative Easing Works: Evidence on the Refinancing Channel

by Marco Di Maggio, Amir Kermani and Christopher Palmer

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.

Keywords: monetary policy; MBS; quantitative easing; LSAP; refinancing; deleveraging; HARP; GSE; Central Banking; Global Range; Financing and Loans; Credit; United States;

Format: Print

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Citation:

Di Maggio, Marco, Amir Kermani, and Christopher Palmer. "How Quantitative Easing Works: Evidence on the Refinancing Channel." Review of Economic Studies 87, no. 3 (May 2020): 1498–1528.

In November 2018, Shaival Shah, the founder and CEO of Ribbon Home had to decide on the next steps for the company. Ribbon had introduced a program that backs consumers with cash offers without creating a loan structure in order to help them compete with iBuyers, such as Zillow Offers and Opendoor. Ribbon had experienced a successful launch in Charlotte, North Carolina which prompted urgent strategic questions. Among them was the appropriate funding model – whether Ribbon be mainly a platform for others to fund transactions, or should it buy and hold homes on its balance sheet, which it could securitize and sell using a line of credit.

Case | HBS Case Collection | March 2020 (Revised November 2020)

FinTech Hive at DIFC: Creating a Fintech Ecosystem in Dubai

Marco Di Maggio and Gamze Yucaoglu

The case opens in 2019 as Raja Al Mazrouei, executive vice president of FinTech Hive (the Hive) at the Dubai International Financial Centre (DIFC), the first and largest financial technology accelerator in the Middle East, Africa and South Asia region, contemplates her and the Hive’s option to support the fintech ecosystem in Dubai as the accelerated startups face funding challenges in the market.
The case chronicles Al Mazrouei’s efforts to set up the Hive in 2016 to create a fintech ecosystem in the region in line with the Kingdom’s National Agenda to help financial institutions engage with technology to remain relevant to the region’s evolving customer and market needs. The case provides a detailed overview of the model the Hive was based on and its growth story that led the Hive to rank as the 10th largest Global Fintech Hub and the 3rd biggest Global Islamic Fintech Hub in 2019.
Having successfully “graduated” two classes of startups, in 2019 the Hive had signed partnerships with accelerators and incubators around the world and had announced a $100 million dedicated fund to support fintech companies globally. Yet, Al Mazrouei knew that she had just scratched the surface and there was a lot to be done. The investment mentality in the region was still quite conservative, and there were only a few venture capital funds and angel investors were virtually non-existent. The continued success of the startups depended on their access to funding and Al Mazrouei was concerned about the Hive’s ability to support the increasing number of fintech startups the Hive had lured to Dubai. One such startup that had successfully graduated from the Hive’s 2018 accelerator program was in the market raising funds. Would they succeed? Would the Hive’s funds be enough to encourage VCs, financial institutions, and angel investors to join in and invest in early-stage fintech startups to keep them going? How much longer could the Hive shoulder the weight of bolstering the fintech ecosystem in the UAE?

Keywords: fintech; Emerging Markets; Business Startups; Venture Capital; Management; Technology; Growth Management; Financial Markets; Financial Institutions; United Arab Emirates; Middle East; Dubai;

Citation:

Di Maggio, Marco, and Gamze Yucaoglu. "FinTech Hive at DIFC: Creating a Fintech Ecosystem in Dubai." Harvard Business School Case 220-066, March 2020. (Revised November 2020.) View Details

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How Quantitative Easing Works: Evidence on the Refinancing Channel

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