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Mortgage Loan Rates and Deposit Costs: Are They Reliably Linked?

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  • Darrat, Ali F
  • Dickens, Ross N
  • Glascock, John L

Abstract

The deposit-cost markup theory of Jaffe and Rosen's type suggests that the cost of attracting funds determines prices (mortgage loan rates). Other equally plausible theories argue for the reverse chain of events, whereby mortgage loan rates induce changes in the deposit interest rates. We investigate these alternative hypotheses over the monthly period 1970 to 1994 using causality and cointegration tests with allowances for possible structural breaks. The results from error-correction models indicate the presence of bidirectional causality between the mortgage loan rates and the deposit interest rates. The results further show that the two variables exhibit a strong cointegrating relationship and that several factors play an important role in determining both variables. Our findings underscore the need to continue with efforts to develop and test multivariate error-correction models for the joint determination of the mortgage loan rate and the deposit interest rate. Copyright 1998 by Kluwer Academic Publishers

Suggested Citation

  • Darrat, Ali F & Dickens, Ross N & Glascock, John L, 1998. "Mortgage Loan Rates and Deposit Costs: Are They Reliably Linked?," The Journal of Real Estate Finance and Economics, Springer, vol. 16(1), pages 27-42, January.
    • Handle: RePEc:kap:jrefec:v:16:y:1998:i:1:p:27-42
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    Cited by:

    1. I.Fatnassi & S.Chawechi & Z.Ftiti & A.Ben Maatoug, 2014. "Effects of Monetary Policy on the REIT Returns," Working Papers 2014-63, Department of Research, Ipag Business School.
    2. repec:ipg:wpaper:2014-063 is not listed on IDEAS
    3. Fatnassi, Ibrahim & Slim, Chaouachi & Ftiti, Zied & Ben Maatoug, Abderrazek, 2014. "Effects of monetary policy on the REIT returns: Evidence from the United Kingdom," Research in International Business and Finance, Elsevier, vol. 32(C), pages 15-26.

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