The Last Mile of Monetary Policy: Inattention, Reminders, and the Refinancing Channel

From Shane Byrne, Kenneth Devine, Michael King, Yvonne McCarthy and Christopher Palmer

Under-refinancing limits the transmission of accommodative monetary policy to the household sector and costs mortgage holders in many countries a significant fraction of income annually. We test whether targeted communication can reduce the attention frictions that inhibit transmission by partnering with a large bank to analyze a field experiment testing messages sent to 12,000 Irish households. While we find only small effects of disclosure design improvements, a reminder letter increases refinancing by 76%, from 8.9% to 15.7%. To interpret this reminder effect, we extend and estimate a mixture model of inattentive financial decision-making to allow for disclosure treatment effects on attention. We find that reminders increase the likelihood mortgage holders are attentive by over 60%, from 24% to 39%. A conservative back-of-the-envelope cost-effectiveness calculation implies that the average reminder letter generated €42 of mortgagor consumption (€605 per refinancing household). Our results illustrate that targeted central bank communication such as refinancing reminders could have a larger effect on refinancing than a standard policy rate cut. Reminders could further strengthen the refinancing channel and stimulate local consumption even when policy rates are at the zero-lower bound or set in a monetary union.