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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. Severin Borenstein & A. Colin Cameron, 1992. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," NBER Working Papers 4138, National Bureau of Economic Research, Inc.
  2. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
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  8. 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, Mohr Siebeck, Tübingen, vol. 154(4), pages 659-, December.
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  10. Leo de Haan & Elmer Sterken, 2005. "Asymmetric Price Adjustment in the Dutch Mortgage Market," DNB Working Papers, Netherlands Central Bank, Research Department 061, Netherlands Central Bank, Research Department.
  11. Reagan, Patricia B. & Weitzman, Martin L., 1982. "Asymmetries in price and quantity adjustments by the competitive firm," Journal of Economic Theory, Elsevier, Elsevier, vol. 27(2), pages 410-420, August.
  12. Daniel Levy & Shantanu Dutta & Mark Bergen & Robert Venable, 1998. "Price adjustment at multiproduct retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(2), pages 81-120.
  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, Federal Reserve Bank of Dallas, issue Q3, pages 23-29.
  14. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 791-825, August.
  15. 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.
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Cited by:
  1. Leo Haan & Elmer Sterken, 2011. "Bank-Specific Daily Interest Rate Adjustment in the Dutch Mortgage Market," Journal of Financial Services Research, Springer, Springer, vol. 39(3), pages 145-159, June.
  2. Elmer Sterken, 2006. "Competition in the Dutch Mortgage Market," De Economist, Springer, Springer, vol. 154(4), pages 587-600, December.
  3. 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, The Economic Society of Australia, vol. 88(282), pages 341-350, 09.
  4. Michiel van Leuvensteijn & Wolter Hassink, 2003. "Price-setting and price dispersion in the Dutch mortgage market," CPB Discussion Paper, CPB Netherlands Bureau for Economic Policy Analysis 21, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Wolter Hassink & Michiel Leuvensteijn, 2007. "Measuring Transparency in the Dutch Mortgage Market," De Economist, Springer, Springer, vol. 155(1), pages 23-47, March.
  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, School of Economics, University of Wollongong, NSW, Australia wp12-02, School of Economics, University of Wollongong, NSW, Australia.
  7. Jason Allen & Darcey McVanel, 2009. "Price Movements in the Canadian Residential Mortgage Market," Working Papers, Bank of Canada 09-13, Bank of Canada.
  8. 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, Taylor & Francis Journals, vol. 20(9), pages 869-874, June.
  9. Escobari, Diego, 2012. "Asymmetric Price Adjustments in Airlines," MPRA Paper 42115, University Library of Munich, Germany.
  10. Daniel Levy, 2006. "Price Rigidity and Flexibility: New Empirical Evidence," Emory Economics, Department of Economics, Emory University (Atlanta) 0611, Department of Economics, Emory University (Atlanta).
  11. 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, Elsevier, vol. 26(C), pages 133-151.
  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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