Macroeconomic Determinants of Interest Rate Volatility in Indonesia: A Structural VAR Analysis

Abstract

The determination of interest rates is not only influenced by inflation rate but also the sharing of factors of other macroeconomic variables. The study of the determinants interest rate has developed based on the variability and the methodological concept. Since the purpose of this study is to analyze the effect of macroeconomic variables on the interest rate volatility in Indonesia, we apply ordinary least square to estimates the empirical model of interest rate determinants statically, and the structural VAR analysis dynamically. The result of the estimation reveals that the coefficient estimates of money supply, exchange rate, and the GDP growth have negative and significant effect in the long-run. However, the risk premium shock has positive and significant effect on the interest rate and inflation rate in Indonesia.