Does the Flexible Mortgage Rate Exhibit Asymmetric Response to Changes in the Repo Rate? Are the Effects Consistent with Upward or Downward Rigidity?
Evidence indicates that the flexible mortgage rate exhibits asymmetric adjustment to the repo rate changes. The flexible mortgage rates display downward rigidity to policy rate changes. Increases in negative deviations from the equilibrium due to monetary policy tightening tend to be less persistent than positive discrepancies due to expansionary monetary policy. The prevalence of downward rigidity in the flexible mortgage rate implies that a reduction in the repo rate (expansionary monetary policy) will impact the economy differently compared to the effects of contractionary monetary policy. This evidence is characteristic of the prevalence of low competition in the banking sector, existence of switching costs and adjustment costs.
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