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Why do prices rise faster than they fall? With an application to mortgage rates

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  • Linda A. Toolsema

    (University of Groningen, Groningen, The Netherlands)

  • Jan P. A. M. Jacobs

    (University of Groningen, Groningen, The Netherlands)

Abstract

Empirical literature shows that prices respond asymmetrically to cost changes in many markets, rising faster than falling. An example is the mortgage rate, which follows an increase in capital market rates faster than a decrease. We examine various theoretical explanations for asymmetric price adjustments in general and discuss their validity for the mortgage rate. We show that in The Netherlands mortgage rates indeed respond asymmetrically to changes in capital market rates and consider the relevance of theoretical explanations for this particular market. Copyright © 2007 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 28 (2007)
Issue (Month): 7 ()
Pages: 701-712

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Handle: RePEc:wly:mgtdec:v:28:y:2007:i:7:p:701-712

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Daniel Levy & Shantanu Dutta & Mark Bergen & Robert Venable, 1998. "Price adjustment at multiproduct retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 81-120.
  2. Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn.
  3. Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 305-39, February.
  4. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
  5. Neumark, David & Sharpe, Steven A, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 657-80, May.
  6. Reagan, Patricia B. & Weitzman, Martin L., 1982. "Asymmetries in price and quantity adjustments by the competitive firm," Journal of Economic Theory, Elsevier, vol. 27(2), pages 410-420, August.
  7. Michiel van Leuvensteijn & Wolter Hassink, 2003. "Price-setting and price dispersion in the Dutch mortgage market," CPB Discussion Paper 21, CPB Netherlands Bureau for Economic Policy Analysis.
  8. Rockoff, Hugh, 1998. "The Peace Dividend in Historical Perspective," American Economic Review, American Economic Association, vol. 88(2), pages 46-50, May.
  9. Erwin Charlier & Arjan van Bussel, 2003. "Prepayment Behavior of Dutch Mortgagors: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 165-204, 06.
  10. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA.
  11. Godby, R. & Stengos, T. & Wandsschneider, B., 1997. "Testing for Asymmetric Pricing in the Canadian Retail Gasoline Market," Working Papers 1997-4, University of Guelph, Department of Economics and Finance.
  12. Richard Damania & Bill Z. Yang, 1998. "Price Rigidity and Asymmetric Price Adjustment in a Repeated Oligopoly," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(4), pages 659-, December.
  13. Stephen P. A. Brown & Mine K. Yücel, 2000. "Gasoline and crude oil prices: why the asymmetry?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q3, pages 23-29.
  14. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  15. Leo de Haan & Elmer Sterken, 2005. "Asymmetric Price Adjustment in the Dutch Mortgage Market," DNB Working Papers 061, Netherlands Central Bank, Research Department.
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Cited by:
  1. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647.
  2. Michiel van Leuvensteijn & Wolter Hassink, 2003. "Price-setting and price dispersion in the Dutch mortgage market," CPB Discussion Paper 21, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Valadkhani, Abbas, 2013. "The pricing behaviour of Australian banks and building societies in the residential mortgage market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 133-151.
  4. Abbas Valadkhani & Sajid Anwar, 2012. "Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 341-350, 09.
  5. Elmer Sterken, 2006. "Competition in the Dutch Mortgage Market," De Economist, Springer, vol. 154(4), pages 587-600, December.
  6. Abbas Valadkhani & Sajid Anwar & Amir Arjonandi, 2012. "How to capture the full extent of price stickiness in credit card interest rates?," Economics Working Papers wp12-02, School of Economics, University of Wollongong, NSW, Australia.
  7. Diego Escobari, 2013. "Asymmetric Price Adjustments in Airlines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(2), pages 74-85, 03.
  8. Wolter Hassink & Michiel Leuvensteijn, 2007. "Measuring Transparency in the Dutch Mortgage Market," De Economist, Springer, vol. 155(1), pages 23-47, March.
  9. Jason Allen & Darcey McVanel, 2009. "Price Movements in the Canadian Residential Mortgage Market," Working Papers 09-13, Bank of Canada.
  10. Leo Haan & Elmer Sterken, 2011. "Bank-Specific Daily Interest Rate Adjustment in the Dutch Mortgage Market," Journal of Financial Services Research, Springer, vol. 39(3), pages 145-159, June.
  11. Abbas Valadkhani & Amir Arjomandi & Martin O'Brien, 2013. "Does the interest rate for business loans respond asymmetrically to changes in the cash rate?," Applied Economics Letters, Taylor & Francis Journals, vol. 20(9), pages 869-874, June.
  12. Craigwell, Roland & Moore, Winston & Worrell, DeLisle, 2011. "Does Consumer Price Rigidity Exist in Barbados?," MPRA Paper 40928, University Library of Munich, Germany.

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