Deposit Interest Rates Dynamics in Indonesia: A Quadratic Cost Function Approach with Twin Shock Variables
Deposit Interest Rates Dynamics in Indonesia: A Quadratic Cost Function Approach with Twin Shock Variables

Summary/Abstract: The purpose of this study is to estimate the deposits interest rate dynamics using quadratic cost function approach with twin shock variable (economic and foreign exchange fluctuations). Using this approach, a backward- and a forward-looking modelwith twin shock variables may be derived. Based on non-nested test, the empirical studies reveal that the two models can not be discrimated or the results are inconclusive. With respect to the level of development of financial feature in Indonesia, the results may allow us to suggest that the future forcing variable and twin shock variables can be potentially key variable of the deposit interest rates dynamics in Indonesia. The findings may indicate that in the short- and long-term, the inflation rate, the twin shock variables (economic fluctuations and exchange rate shock) have a positive effect on the deposit interest rates in Indonesia.

• Details
• Contents