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.
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Notes
The main advantages of the AMG model are discussed in Sect. 4.4 because of the space limitation of Introduction.
Owner-occupied loans indicate the value of housing loans to Australian households for the construction or purchase of dwellings for owner occupation; revolving credit or redraw facilities are originally approved for the purpose of predominantly owner-occupied housing (APRA 2017).
The 3-month BBSW, which represents the midpoint of the nationally observed best bid and best offer for AFMA Prime Bank Eligible Securities, including bank accepted bills and negotiable certificates of deposit, is used to provide reference interest rates for the pricing and revaluation of Australian dollar derivatives and debt securities.
This model is based on the markup pricing contribution of Rousseas (1985).
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Acknowledgements
The authors wish to acknowledge the constructive advice, useful comments, and helpful suggestions given to us by two anonymous journal reviewers and by participants at the Lunchbox seminar—PhD edition held by Griffith Environmental Futures Research Institute on 15 September 2017, at the Social and Affordable Housing Symposium held by Griffith University in Brisbane, Australia on 25 September 2017, and at the Campus for Finance—WHU New Year’s Conference on 17–18 January 2018 in Koblenz, Germany. We are responsible for any error or omissions remained.
Funding
This study was funded by the Vietnamese Government, Project 165_5877-QĐ/BTCTW.
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Holland, Q.C.P., Liu, B. & Roca, E. International funding cost and heterogeneous mortgage interest-rate pass-through: a bank-level analysis. Empir Econ 57, 1255–1289 (2019). https://doi.org/10.1007/s00181-018-1488-6
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DOI: https://doi.org/10.1007/s00181-018-1488-6