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Regional Interest Rate Variations: Evidence from the Indonesian Credit Markets

Masagus M Ridhwan, Henri de Groot (), Piet Rietveld and Peter Nijkamp

No 12-073/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

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.

Keywords: regional capital mobility; loan pricing; interest rates; Indonesia (search for similar items in EconPapers)
JEL-codes: R51 E43 C33 (search for similar items in EconPapers)
Date: 2012-07-18
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