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

Author

Listed:
  • Quynh Chau Pham Holland

    (Griffith University
    University of Finance and Marketing)

  • Benjamin Liu

    (Griffith University)

  • Eduardo Roca

    (Griffith University)

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.

Suggested Citation

  • Quynh Chau Pham Holland & Benjamin Liu & Eduardo Roca, 2019. "International funding cost and heterogeneous mortgage interest-rate pass-through: a bank-level analysis," Empirical Economics, Springer, vol. 57(4), pages 1255-1289, October.
    • Handle: RePEc:spr:empeco:v:57:y:2019:i:4:d:10.1007_s00181-018-1488-6
    DOI: 10.1007/s00181-018-1488-6
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    More about this item

    Keywords

    Asymmetry; Heterogeneity; Cross-sectional dependence; Interest rate pass-through; Bank mortgages; AMG models;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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