Do Deposit Rates Cause Mortgage Loan Rates?: The Evidence from Causality Tests

Abstract

This paper applies two familiar causality detection techniques to the issue of whether it is costs that determine prices or vice versa in the mortgage loan market. The question is posed in terms of causal priority: Are savings and loan deposit rates causally prior to mortgage loan rates or is it the other way around? For the time period prior to the onset of deposit interest rate deregulation, the evidence that emerges is consistent with the view that lenders raised their loan rates in response to higher deposit rates of interest. However, for the more recent period of deregulation, the evidence is not consistent with this view.