The Effect of Interest Rates, Exchange Rates, and Foreign Direct Investment on Financial Stability in Indonesia
DOI:
https://doi.org/10.15678/AOC.2024.2603Abstract
Objective: The purpose of this study is to analyse the effect of interest rates, exchange rates, and foreign direct investment on the financial stability of banks in Indonesia.
Research Design & Methods: This study uses secondary data in the form of time series data from 2007 to 2021. Data sources come from publications and dynamic statistics of the World Bank and International Monetary Fund (IMF). The analysis technique used is multiple linear regression analysis with the Ordinary Least Squares (OLS) method.
Findings: The findings show that interest rates have a significant negative correlation with banking stability, while exchange rates and foreign direct investment have a significant positive correlation. Rising interest rates can reduce demand for credit and economic activity, while exchange rate depreciation can help improve financial stability by improving competitiveness of exports. Foreign direct investment also plays an important role in providing banks with stable long-term capital flows, helping to overcome liquidity challenges, and increasing the diversity of bank income. Policy responses to foreign direct investment during the global crisis and the COVID-19 pandemic showed significant differences, with an emphasis on incentives and stimuli to support post-pandemic economic recovery.
Implications/Recommendations: Monetary and banking authorities need to work together to closely monitor and manage interest rate policy, thus maintaining a balance between supporting economic growth and the stability of the banking. Indonesian banks need to improve their foreign exchange risk management. Policies should support sound foreign investment while addressing potential risks.
Contribution: This study makes an important contribution to understanding the complexity of the interaction between interest rates, exchange rates, and foreign direct investment, and their effects on the financial stability of banks in Indonesia. The findings of this study provide valuable insights for policymakers, monetary authorities, and banking industry players in designing effective economic policies and maintaining the stability of the financial sector. In addition, this research can also provide a foundation for further research in this field, which can further contribute to the development of theory and practice related to financial stability in developing countries.
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