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Regional Interest Rate Variations: Evidence from the Indonesian Credit Markets

Author

Listed:
  • Masagus M. Ridhwan

    (VU University Amsterdam)

  • Henri L.F. de Groot

    (VU University Amsterdam)

  • Piet Rietveld

    (VU University Amsterdam)

  • Peter Nijkamp

    (VU University Amsterdam)

Abstract

This paper explores the determinants of regional differences in interest rates based on a simple theoretical model of loan pricing. The model demonstrates how risks, costs, market concentration and scale economies jointly determine the bank's interest rates. Using recent data of the Indonesian local credit markets, we find that regional interest rate variations are positive and significantly affected by the banks' risk factor, the operating costs, and market concentration. Scale economies negatively affect the interest rates. These findings help to explain geographical segmentation in loan markets.

Suggested Citation

  • Masagus M. Ridhwan & Henri L.F. de Groot & Piet Rietveld & Peter Nijkamp, 2012. "Regional Interest Rate Variations: Evidence from the Indonesian Credit Markets," Tinbergen Institute Discussion Papers 12-073/3, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20120073
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    More about this item

    Keywords

    regional capital mobility; loan pricing; interest rates; Indonesia;
    All these keywords.

    JEL classification:

    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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