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Asymmetric behavior of Australia's Big-4 banks in the mortgage market

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  • Valadkhani, Abbas
  • Worthington, Andrew

Abstract

This paper presents an alternative framework for modeling the behavior of banks in setting lending and/or saving rates. In a short-run dynamic model, we correct for deviations from the long-run path using three feedback coefficients capturing different disequilibria. This enables us to test for both amount and adjustment asymmetries by considering the size and direction of any deviations. We use this model to examine the relationship between the official cash rate (set by the Reserve Bank of Australia as a monetary policy tool) and the standard variable mortgage rates of Australian Big-4 banks using weekly data from 2001 to 2012. The evidence indicates both types of asymmetries along with synchronized rate-setting behavior. Overall, the banks immediately pass on 120% of any rate rise, but only 85% of any rate cut. Further, when mortgage rates are substantially above the equilibrium path, we find no significant attempt to lower rates, but faster adjustment when rates are below equilibrium values. This finding has important implications for the RBA's monetary policy transmission mechanism and the effectiveness of the expansionary versus contractionary policy.

Suggested Citation

  • Valadkhani, Abbas & Worthington, Andrew, 2014. "Asymmetric behavior of Australia's Big-4 banks in the mortgage market," Economic Modelling, Elsevier, vol. 43(C), pages 57-66.
  • Handle: RePEc:eee:ecmode:v:43:y:2014:i:c:p:57-66
    DOI: 10.1016/j.econmod.2014.07.044
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    References listed on IDEAS

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    Cited by:

    1. Holmes, Mark J. & Iregui, Ana María & Otero, Jesús, 2015. "Interest rate pass through and asymmetries in retail deposit and lending rates: An analysis using data from Colombian banks," Economic Modelling, Elsevier, vol. 49(C), pages 270-277.

    More about this item

    Keywords

    Monetary policy; Mortgages; Interest rates; Asymmetric behavior; Australia;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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