Fiscal Policy and Geographic Variation in the Refinancing Channel

We study how fiscal policy affects the transmission of monetary policy using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment. The TCJA capped deductions for state and local taxes, (SALT), and increased the standard deduction, causing many households to switch from itemizing to taking the standard deduction. Households that stopped deducting mortgage interest increased their after-tax mortgage rate, increasing both their refinance incentive and the return to accelerating their balance payoff. Using a difference-in-differences design with a novel method for inferring a loan’s itemizing status, we compare the refinance and debt paydown behavior of households that likely stopped itemizing. We find that for households who stopped itemizing, the TCJA increased the refinance probability conditional on refinance incentive. The law change had no detectable effect on deleveraging for borrowers’ existing mortgage through reduced cash-out refinancing, increased cash-in refinancing, or accelerated paydown