Taiwanese Mortgage Rate, Central Bank Discount Rate & Conditional Heteroscedasticity in Post-1997 Asian Financial Crisis

Abstract

Asymmetries in the Taiwanese mortgage loan-central bank discount rates spread (mortgage loan premium) were documented. Empirical results revealed that the mortgage loan premium adjusts to the threshold faster when the central bank discount rate increases relative to the mortgage loan rates than when the discount rate moves in the opposite direction. Additionally, the empirical findings indicate that Taiwanese commercial banks still exhibit predatory rate setting behavior, despite of the recent deregulations in banking sector. The empirical results also revealed the bidirectional Granger causality between the Taiwanese mortgage loan rate and the discount rate, indicating that the mortgage loan rate and the discount rate affect each other’s movements. These empirical results suggest that Taiwanese monetary authority can use its countercyclical monetary policy instrument to achieve its macroeconomics objectives in the short run.