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An assessment of mortgage interest inflation measurement bias in the UK

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  • Damian Ward

Abstract

This article recognizes the highly differentiated nature of UK mortgages. Applying hedonic pricing models in the generation of interest quality adjusted indices this study would suggest the need for a 0.24 percentage point increase in the retail price index (RPI) (which, at an average RPI of 3%, represents a measurement error of 9%). Moreover, this study finds that lenders tend to restrain increases in observable initial interest rates, but more than recoup this restraint through quality adjustments. These findings question the practice of removing mortgage interest repayments from macroeconomic inflationary target measures. This indicates the need to recognize the indirect inflationary impact of base rate rises on the price of highly differentiated debt based products.

Suggested Citation

  • Damian Ward, 2008. "An assessment of mortgage interest inflation measurement bias in the UK," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(3), pages 373-386.
    • Handle: RePEc:taf:irapec:v:22:y:2008:i:3:p:373-386
    DOI: 10.1080/02692170802005405
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