Why do prices rise faster than they fall? With an application to mortgage rates

Empirical literature shows that prices respond asymmetrically to cost changes in many markets, rising faster than falling. An example is the mortgage rate, which follows an increase in capital market rates faster than a decrease. We examine various theoretical explanations for asymmetric price adjustments in general and discuss their validity for the mortgage rate. We show that in The Netherlands mortgage rates indeed respond asymmetrically to changes in capital market rates and consider the relevance of theoretical explanations for this particular market. Copyright © 2007 John Wiley & Sons, Ltd.