International funding cost and heterogeneous mortgage interest-rate pass-through: a bank-level analysis

Quynh Holland (), Benjamin Liu () and Eduardo Roca
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Benjamin Liu: Griffith University

Empirical Economics, 2019, vol. 57, issue 4, No 8, 1255-1289

Abstract: Abstract This study examines the transmission of the cost-of-funds rates, domestically and internationally, to owner-occupied housing interest rates at the bank level for the period 2002(7)–2015(12) in Australia. Three main issues, cross-sectional dependence, parameter heterogeneity, and asymmetry, have been considered using the linear and nonlinear common-factor Augmented Mean Group estimators. Significant unobservable coefficients in all estimates ascertain that unobserved common factors arising from both national and global shocks have a significant influence on mortgage rate transmission. The results of sizable heterogeneity and asymmetry, found in all estimates while controlling for cross-sectional correlations, highlight the substantial effect of the foreign-funds rate on long-run mortgage price setting. We find a closer connection between mortgage interest rates and international funding cost; we have also confirmed a declining transmission of the policy rate after the 2008 global financial crisis.

Keywords: Asymmetry; Heterogeneity; Cross-sectional dependence; Interest rate pass-through; Bank mortgages; AMG models (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 G21 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s00181-018-1488-6

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