TAILIEUCHUNG - The financial crisis and the pricing of interest rates in the Irish mortgage market: 2003-2011

Long term interest rates play an important role in economics and Önance due to their impact on real activity. Nevertheless, it is widely recognized that forecasting their level is di¢ cult. In the same way, modelling their link to monetary policy is not so easy even if this relationship appears crucial, as emphasized by Goodfriend (1993) for the United States. Similarly the same di¢ culty concerns the rational expectations hypothesis framework in which most empirical analyses of the term structure of interest rates are conducted. This approach postulates that long term rates are a weighted average of current and expected future short rates plus a constant term premium | 1 RT 12 Páipéar Taighde Teicniúil Research Technical Paper The financial crisis and the pricing of interest rates in the Irish mortgage market 2003-2011 Jean Goggin Sarah Holton Jane Kelly Reamonn Lydon and Kieran McQuinn Banc Ceannais na hÉireann Central Bank of Ireland Eurosystem The financial crisis and the pricing of interest rates in the Irish mortgage market 2003-2011 Jean Goggin Sarah Holton Jane Kelly Reamonn Lydon and Kieran McQuinn Abstract This paper examines the changing manner in which Irish financial institutions set their variable interest rates over the period 2003 - 2011. In particular the onset of the financial crisis clearly results in a break in the pass-through relationship between market rates and variable rates at the end of 2008 in the Irish mortgage market. Until the end of 2008 variable rates for all lenders closely followed changes in the ECB s policy rates short-term wholesale rates and tracker rate mortgages. Thereafter the relationship breaks down in part due to banks increased market funding costs. It appears that some lenders with higher mortgage arrears rates and a greater proportion of tracker rate loans on their books exhibit higher variable rates. After controlling for these factors and additional funding costs most of the divergence between banks variable rates is explained but there are some exceptions. There is also some evidence of asymmetric adjustment in rate setting behaviour that is rates tend to adjust slowly when they are above the long-run predicted level but more quickly when they are below this level. This asymmetric adjustment behaviour appears to increase in the post-2008 period. 2 Non Technical Summary Over the period 2003 - 2011 there are two clear regimes indentifiable in the relationship between policy rates and the variable rates offered by Irish financial institutions. Up to 2008 standard variable rates in the Irish mortgage market closely followed policy rates and consequently tracker rate mortgages. From .

• Ngân hàng - Tín dụng
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• reduction of prevalence
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• Description
• notification systems
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• Subjects and Methods
• cross sectional