The dynamic adjustment of the U.S. mortgage rate

Potential asymmetries in the relationship between the U.S. mortgage rate and the Federal Funds rate are explored. In contrast to previous studies which have failed to detect evidence of asymmetric adjustment, the present analysis is based upon examination of the differential between the series. Using a recently proposed GLS-based MTAR unit root test, overwhelming evidence of asymmetric behaviour in the interest rate differential is detected. Further analysis using asymmetric error correction models shows (i) the Federal Funds rate to be weakly exogenous with respect to the mortgage rate, (ii) short-run mutual dependence to exist between the series in the form of bidirectional Granger causality, and (iii) the mortgage rate to exhibit asymmetrical behaviour with differing speeds of adjustment detected in response to changes in the interest rate differential. The asymmetry detected is in the form of adjustment occurring more rapidly when the change in the mortgage-Federal Funds rate falls below a derived threshold. The implications of this newly detected asymmetry for monetary policy transmission are noted. Keywords