THE CORRELATION BETWEEN CASH POSITION OF TIME

DEPOSITS TOWARD TIME DEPOSIT INTERESTS AND

INFLATIONS

For

By
Ryandana A.S.
008200800045
 I. INTRODUCTION

1.1. Background of Study

Balance of payments crises are a pain in the neck for bankers and finance ministers. Not only
do they seem to arise quite frequently, but also recur. In order to deal with such crises, and
avoid future ones, it is important to recognize that speculative capital flows generally arise
from the decisions of rational investors making forecasts on the basis of the real conditions
and information they have available at the time. In order to reverse the draining run on a
currency, the conditions that give rise to the speculative flow must be reversed. In this case,
stepping on the monetary brakes would be a possible solution, although only a committed
policy would change the investors’ expectations. A casual, temporary, once-and-for all
decline in the money supply would have no effect on agents’ expectations and would not
prevent the crisis. Long-term commitments to policy changes would be required. (Batiz,
1985, page. 385).

From that quotation we can make the reflection when the crisis happened in Indonesia. The
commitments of government become the most important things to give trust for the investors.
The steady commitment from government will give positive effect to increase the economic
growth with stability in financial market and banking. In financial market, the roles of
investors become very important to encourage and stabilize the exchange rate and also
inflation. Besides we must give attention to the internal economic factors, we must also give
the attention to external factor like politic condition, natural condition and etc.

In 1997-1998, Southeast Asia area got crisis that destroy the economic condition. This was
caused by serious financial instability so that many industries in Indonesia become collapse.
This condition was on the top condition and dynamic situation. Ten years later, after little by
little the economic condition in Indonesia was growing 6-7%, crisis occurred again. The
problem was second housing loan (subprime mortgage crisis) which impacted very serious
destroy financial market in investment, insurance, and banking sector. (Harian Pikiran
Rakyat, Kamis 15 Januari 2009)

Monetary crisis was started by decreasing of IDR toward USD. This condition destroyed the
economic industry, such as banking sector. Inflation is one of the causal factors that occurring
economic crisis in a particular country. Inflation is a condition of the prices increase sharply
(absolute) all the while for long time period and followed by real (intrinsic) value of money
in a particular country (Tajul Kahalwaty, 2000:5).

According to Lepi T Tarmidi (EKI: 1999) commonly, the fundamental factor occurred
economic crisis in Indonesia is not caused by the fundamental of economic weakness, but
because of decreasing exchange rate rupiah toward USD. Short term of foreign private debt
since beginning of 1990 had already accumulated very big which mainly are not-hedging
conditions (kept the value from foreign exchange). And then this case add the pressure
toward rupiah exchange, because of unsupplied enough of exchange (devisa) to pay the yield
maturity of debt included interest.

In middle of 1997, the problem of inflation and exchange crisis flipped because the inflation
became two digits and rupiah fall away sharply until reach 11,05 percent. This crisis will
effect to companies which their load debt become very big in foreign currency. Whereas, all
of the financing and transaction depend on bank, banks also get difficult to supply the
operational liquidity to every day. (Jurnal Ekonomi dan Bisnis Antisipasi Vol. 10. No. 1,
Oktober 2006)

The global financial crisis in 2008-2009 which first showed signs in the United States of
America (USA) is becoming contagious and is apparently affecting directly or indirectly,
every economy on the globe. The financial crunch has its roots in a banking practice called
sub-prime lending or sub-prime mortgage lending in the USA. It is traceable to a set of
complex banking problems that developed over time, caused specifically by housing and
credit markets miss-match, poor judgement by borrowers and/or the lenders, inability of
home owners to make mortgage payments, speculation and overbuilding during the boom
period, risky mortgage products (financial innovations with concealed default risks), high
personal and corporate debt profiles and inactive/weak central bank policies. The crisis is
presently putting to test the ingenuity of the management of various central banks world over.

In response to the challenges posed, many countries, governments and their central banks
have intervened by slashing interest rates in the bid to reduce the negative impact and avoid
compounding the crisis from becoming a global financial meltdown. To contain the impact of
the crises, there has so far, been mixed reactions; in Europe for instance, central banks
injected more cash to the market in an on-going attempt to provide liquidity to the financial
system.
One of the first victims was Northern Rock, a medium-sized British bank. The
highly leveraged nature of its business led the bank to request security from the Bank of
England. This in turn led to investor panic and a bank run in mid-September 2007. Calls
by Liberal Democrat Shadow Chancellor Vince Cable to nationalize the institution were
initially ignored; in February 2008, however, the British government (having failed to find a
private sector buyer) relented, and the bank was taken into public hands. Northern Rock's
problems proved to be an early indication of the troubles that would soon befall other banks
and financial institutions.

Initially the companies affected were those directly involved in home construction and
mortgage lending such as Northern Rock and Countrywide, as they could no longer obtain
financing through the credit markets. Over 100 mortgage lenders went bankrupt during 2007
and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008
resulted in its fire-sale to JP Morgan Chase. The crisis hit its peak in September and October
2008. Several major institutions failed, were acquired under duress, or were subject to
government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie
Mac, Washington Mutual, Wachovia, and AIG. Another automotive companies like General
Motor, Ford and Chrysler. Here strategy of bail out is used to solve and maintain the
economic situation so that the effect will not spread rapidly.

The development and interest rates domestic are influenced by several factors neither
domestic nor overseas like international interest rate, domestic factors like (inflation
expectation, banking condition, or step and action monetary authority). For monetary
authority, progress and interest rate are monetary indicators that very important. In one side,
the progress of interest rates must reflect fundamental factors. In other side, interest rate
devises to be able to support achievement macro economics targets that already set by
government, like inflation, domestic demand, money supply and capital in.

The problem of interest rates in Indonesia becomes important to determine effective or not
banking recapitalization program. Interest rate that still too high is not effective for banking
performance after recapitalization. It means, although already inject with much of fresh
money, national banking will not be strong to stand up if their capital still decrease
persistently as a consequent of negative spread.

In market mechanism like in Indonesia, absolutely the interest rate is occurred by reflection
from the power of demand and supply fund in society. This is because interest rate is very
important in economic policy. Increasing of needs for financing will effect raising the interest
rate. In Indonesian policy, interest rate will push the inflation movement and maintain high
interest rate. In other word, the circulation will be stretched can maintain the level of price in
secure.

One of the important parts of financial crisis in Indonesia is related to time deposit. Time
deposit is the indicator to run the business of the banking industry. Banking industry also gets
profit from here. Deposit or saving is used by bank as a capital and instrument to give credit
for the industries and companies. Time deposit is influenced by internal factors like GDP,
Exchange Rate, Interest Rate and Inflation and external factors like politic and natural
factors.

1.2. Problem Identified

According to the law of banking no. 1998, fund gathering about saving society that done by
commercial bank. Fund gathering types are: Gyro, Time Deposit, Certificates of Deposit, savings
and other type that can be similar zed. From several funds society neither in rupiah nor foreign
exchange, the biggest portion is time deposit component. This time deposit in the beginning is
very dependence on the power of saving this society itself, where it reflects in national income.
Before the public decide to save their money in the bank, there are many factors to consider like:
SBI (Bank of Indonesian interest rate), exchange rate rupiah toward US$, inflation, and time
deposit interest rate.

According to classic theory, interest rate is the function of saving which if the interest rate high;
the public will be influenced to save their money in banking sectors. Actually not all the factors
will be correlated with the condition of time deposit’s demand itself but through this research we
take the factors as the samples to proof whether those factors correlate with the demand of time
deposit or not. According to the background that already describes, the author attracts to doing
research about “The Correlation between the Cash Position of Time Deposits toward
Time Deposit Interests and Inflations in Commercial Banks during Period October
2007 – March 2010”.

1.3 Statement of Problem

This research is analyzing the effect of time deposit interest, inflation, and exchange rate
toward the demand of time deposit in commercial bank.
The following problem statements have been used to guide this research work:
 • Is there any effect of time deposit interest and inflation toward the demand of time
deposit in commercial bank during period October 2007 to March 2010?

• How is the effect and correlation between time deposit interest and inflation toward
the demand of time deposit in commercial bank during period October 2007 to March
2010

1.4. Research Objectives

This study aims to seek and explain correlation and partial correlation time deposit interests
and inflations influence cash positions of time deposit in commercial banks during period
October 2007 to March 2010.

1.5. Significance of Study

This research is conducted for several benefits, which are divided into several aspects:
1. Academic
This thesis is used as fulfillment of final requirement for graduation from President
University, majoring in Banking and Finance of bachelor degree.

2. Writer
The writer will understand the extent of the relationship between time deposit interest
and inflation toward time deposit demand. Thus, this book will be benefit and become
one of references if someone wants to do research about time deposit someday.

3. Banking industry
Understanding the nature of relationship between time deposit interest and inflation
toward time deposit demand will help banks to formulate appropriate strategy in
concordance with bank’s missions and objectives. It also helps government to analyze
the situation about economics’ condition.

1.6. Theoretical Framework

GOVERNMENT
BOND
 TIME INTEREST
GDP DEPOSIT RATE

ECONOMIC TIME DEPOSIT

GROWTH INFLATION RATE

Figure 1.1 Theoretical framework

1.7. Limitations of Study

The research is analyzing the impact on time deposit interest, inflation, and exchange rate
toward the demand of time deposit. For the sake of reliability, the scale and scope of this
research are limited to prevent bias and information overload. Here are several limitations on
this research:

• The research looks upon time series data of a bank using 30 data from October 2007
to March 2010 based on Indonesian Financial Statistic in Bank Indonesia.

• The research will focus mainly on time deposit demand that available in statistic Bank
of Indonesia and all the components that influence time deposit itself like inflation
and time deposit interest. All of the data is come from Bank of Indonesia so that we
can get easier to analyze that.

1.8. Assumptions and Hypothesis

Based on problem statement, there are four variables will be tested and evaluated. Time
deposit interest and inflation are independent variable and the demand of time deposit is
dependent variable.

a. Ho: ryx1 = 0 (There is no significant correlation between Cash Position of Time

Deposits in Commercial Banks with Interest Rate of Time Deposits in Rupiah by
Commercial Bank)
 Ha: ryx1 ≠ 0 (There is significant correlation between Cash Position of Time Deposits
in Commercial Banks with Interest Rate of Time Deposits in Rupiah by Commercial
Bank)

b. Ho: ryx2 = 0 (There is no significant correlation between Cash Position of Time

Deposits in Commercial Banks with Indonesia’s Inflations)
Ha: ryx2 ≠ 0 (There is significant correlation between Cash Position of Time Deposits
in Commercial Banks with Indonesia’s Inflations)

c. Ho: ryx1x2 = 0 (There is no significant correlation of Cash Positions of Time Deposits

in Commercial Banks with Interest Rate of Time Deposits in Rupiah by Commercial
Banks and Indonesia’s Inflations)
Ha: ryx1x2 ≠ 0 (There is significant of correlation Cash Position of Time Deposits in
Commercial Banks with Interest Rate of Time Deposits in Rupiah by Commercial
Bank and Indonesia’s Inflation)

1.9. Definitions and Terms

1. Cash position: the number of money in term of period like monthly, yearly
2. Inflation: a sudden increase in the price of goods and services in the economics,
which lead other goods’ price to increase as well.
3. Loan: money advanced to borrower, to be repaid at later date, usually with interest
charged on it.
4. LDR : loan to deposit rates
5. SBI : Bank of Indonesia interest rate
6. NPL: Non performing loan
7. Interest income: sum of interest and fees earned on all of bank’s assets, including
loans, deposits held in other (financial) institutions, municipal and taxable securities,
and trading account securities.
8. Population: a group of samples.
9. Sample: smallest statistical unit used in analysis.
10. Variable: any characteristics of an object that can be represented in number.
11. Independent variable: the X-variable in regression model. This is used to help predict
the dependent variable.
 12. Dependent variable: the Y-variable in regression model. This is used to help predict
the independent variable.
13. Hypothesis: a tentative explanation of a phenomenon, used as basis for further
investigation.
14. Null Hypothesis: the hypothesis to be tested
15. Alternative hypothesis: the hypothesis accepted when the null hypothesis is rejected.

II. DESCRIPTION THEORY

2.1 Deposits and Its Characteristics

2.1.1. Deposit and Bank
As stated by Shelagh Hefferman (2005), bank is a financial firm which offers loan and
deposit products on the market, and accommodate to the changing liquidity needs of its
borrowers and depositors. A bank is having is fund from the depositors and then used that
fund to distribute to the borrower in order to create a balanced flow of funds in the market.
But in other hand, a bank should have enough funds if the depositor takes their deposit.
Based on IAI (Ikatan Akuntan Indonesia) about PSAK Number 31 in Financial Accounting
Standard, (1991:31.1), bank is defined as follows:
“Bank adalah suatu lembaga yang berperan sebagai perantara keuangan antara pihak-
pihak yang memiliki kelebihan dana dan pihak-pihak yang memerlukan dana, serta sebagai
lembaga yang berfungsi memperlancar lalu-lintas pembayaran”

PSAK “Pernyataan Standar Akuntansi Keuangan” is describing bank as an institution acting

as intermediary between parties having surplus in funds and those lacking funds, also as
institution serving in flow of payments.

The writer shall take conclusion based on these two definitions of bank that as a financial
institution, banks have their role as intermediary by giving services of loan and deposit,
which is, reinforcing the flow of funds. Due to important role of bank in an economy as well
as community, there is a misunderstanding about bank. Nowadays, bank is not only place for
saving and borrowing money, but it is already expanding the scope of business to compete
with other financial institutions. The function of a bank is very various; there are nine
functions of a bank. Therefore, this day is quite difficult to differentiate bank to others
financial institution such as insurance company.

2.1.2Saving deposit
Based on IAI (Ikatan Akuntan Indonesia) about PSAK Number 10 in Financial Accounting
Standard, (1998), saving depositsis defined as follows:
“simpanan yang penarikannya dapat dilakukan menurut syarat-syarat tertentu yang
disepakati, tetapi tidak dapat ditarik dengan cek atau BG atau alat lainnya yang
dipersamakan”. Saving deposit is saving that withdraws with using certain agreed
requirements, but can’t withdraw with using check or demand deposit or certain equal
instrument.

2.1.3Time deposit
Based on IAI (Ikatan Akuntan Indonesia) about PSAK Number 10 in Financial Accounting
Standard, (1998), saving deposits is defined as follows:
“simpanan yang penarikannya hanya dapat dilakukan pada waktu tertentu berdasarkan
perjanjian nasabah penyimpan dengan bank”. Deposit is saving that withdraw only in certain
time based on agreement each party between bank and customer.
Deposit can be called also as time deposit is product of banking like saving that can be
offered to people. Fund in deposit was guaranteed by government through Lembaga
Penjamin Simpanan (LPS) with some particular requirements. Sometimes deposit have
period of time which means money itself cannot be withdrew by costumer. Deposit can be
liquefied based on the date of maturity. Sometimes deposit has maturity in 1, 3, 6, and 12
months. If deposit liquefies before maturity of date, so we will get penalty.

Deposit can be extended automatically using ARO (Automatic Roll Over). Deposit will be
extended automatically after maturity date until the owner liquefies their deposit. The interest
of deposit sometimes is higher than common interest. Interest can be taken after date of
maturity or put in the next period of deposit to deposit again. (www.wikipedia.com)

According to Management of Banking by McDonald/Koch, time deposit is a part of non

transaction accounts. They are interest-bearing accounts with limited or no check-writing
privileges. The accounts generally pay more competitive rates of interest and are fully FDIC-
insured up to USD 100,000 per individual. Time deposits have specified maturities ranging
from seven days to any longer negotiated term, with interest penalties for early withdrawal.

According to The Economics of Money, Banking, and Financial Markets by Mishkin, time
deposit is part of non transaction deposits, constituting primary source of bank funds. Time
deposits have a fixed maturity length, ranging from several months to over five years, and
assess substantial penalties for early withdrawal (forfeiture of several months’ interest). Time
deposits are a more costly source of funds for the banks.

Therefore, it can be concluded that TD has several characteristics:

1. Non transaction
2. Primary source of bank’s funding
3. Offering higher rates than saving/ demand accounts
4. Having specified term of maturity, thus giving penalty for early withdrawal, and
5. The most costly source of fund.

The source of fund from public (third party funding) is the most important funding for
operational bank activity and standard of successful bank if bank can be able to defray their
operation from this fund. Collection of fund from public can be mentioned easier if we
compare with another funding. The society’s funding can be done effectively with higher
interest and give the interesting facility like door prize and satisfying service.
Second deposit is certificate of deposit (CDs). It is time saving based on bank of Indonesia
permission that produced by bank as saving proof which can be traded or hand moved to third
party. Deposit is time saving that produce by bank which withdrew by certain time only based on
term in agreement before. Deposit is divided by two. There are time deposit and certificate of
deposit.

Third deposit is Deposit on call. This is time deposit with maturity minimum seven days and
maximum is 30 days. It is produced with the name of owner and big amount of money, therefore
the interest will appropriate with the agreement from customer and banking parties.

Table 2.1 Differences Time deposits and Certificate of Deposit

No. Difference Time Deposit Certificate of Deposit

In opening bank account
1 Interest payment In every maturity date
(discounted)
2 Holding deed (right) Cannot move Can move
3 Ownership In the name of On sight
4 Counting of interest not discounted Discounted

Target market of deposit is whole of the public, neither individual nor group. The time period of
deposit itself, bank usually offers deposits in certain time period like:

- time period: 1 month - time period: 12 months

- time period: 3 months - time period: 18 months
- time period: 6 months - time period: 24 months

As a note: in commercial bank, development bank, or credit public bank can be produced time
deposit. It means bank itself can gather money from public like time deposit. But to produce
certificate of time deposit only commercial bank and development bank that allowed it. In fact, it
must have permission from bank of Indonesia after fulfill the certain requirement like health and
capability bank itself from capital needs aspect.

Historically, banks were limited in what interest rates they could pay on different types of
deposit. Since 1986, all interest rate restrictions have been eliminated, except for prohibition
of interest on corporate demand deposits. Banks can now compete for deposits by offering
unrestricted interest rate interest rates on virtually all of their liabilities. Larger bank also
issue subordinated notes and debentures, which are long term un-insured debt. Bank
liabilities are composed of transaction accounts, savings and time deposits, and other
borrowings (Management of Banking 2006:59-60).

2.1.3 Transactions Accounts

1. Demand deposits are held by individuals, partnerships, corporations, and
governments that pay no interest. Prior to the Depository Institutions Act of 1980,
they served as the only legal transactions account nationally that could be offered by
depository institutions. Businesses now own the bulk of existing demand deposits
because they are not allowed to own interest –bearing transactions accounts at banks.

2. Negotiable orders of withdrawal (NOW) and Automatic transfer from savings

(ATS) pay interest set by each bank without federal restrictions. These accounts most
commonly referred to as interest checking accounts. Banks often require minimum
balances before a depositor earns interest, impose service charge, and may limit the
number of free checks a customer can write each month, but these terms vary among
situations. These accounts are available only to noncommercial customers.

3. Money market deposit accounts (MMDAs) similarly pay market rates, but a
customer is limited to no more than six checks and automatic transfer each month.
This restriction exempts banks from holding required reserves against MMDAs as
they are technically savings accounts, not transactions accounts. With no required
reserves, banks can pay higher rates of interest on MMDAs versus NOWs for the
same effective cost.

2.1.4 Savings and Time Deposits

1. Savings and time deposits contribute a large portion of funding, especially at
community banks. Pass-book deposits are small-denominations accounts that have no
sets maturity and no check – capabilities. Two general time deposit categories exist
with a $100,000 denomination separating the groups.

2. Time deposits less than $100,000 are most often small certificates of time deposits
(CDs). The features of small CDs are not as standardized as large CDs although most
banks market standardized instruments so that customers are not confused. Banks and
customer negotiate the maturity, interest rate and dollar magnitude of each deposit.
The only stipulation is that small time deposits carry early withdrawal penalties
 whereby banks reduce the effective interest paid if a depositor withdrawals fund prior
to the stated maturity date.

3. Time deposits of $100,000 or more are labeled jumbo certificates of deposit (CDs)
and are negotiable. It means can be bought and sold in the secondary market with a
well-established secondary market. Anyone who buys a jumbo CD can easily sell it in
the secondary market as long as the issuing bank is not suffering known problems.
The most common maturities are one month, three months, and six months, with 1$
million the typical size. Most CDs are sold to non financial corporations, local
government units and other financial institutions.

2.1.5Other borrowings
1. Federal funds and securities sold under agreement to repurchase (Repos) are
liabilities created from the exchange of immediately available funds, or balances that
can be cleared immediately. Federal funds purchased generally have maturities of 1-7
days and represent the exchange of clearing balances at the Federal Reserve Bank or
correspondent bank. Federal Funds are unsecured while repos are collateralized by
securities owned by borrowing institution.

2. Brokered deposits most often refer to jumbo CDs that a bank obtains trough a third –
party broker or brokerage house that markets the CDs to its customers. These are
separated because the bank has virtually no customer contact with the holders of these
CDs. The funds are considered volatile and will leave the bank quickly when a
competitor offers a higher rate. Regulators can designate other bank deposits
depending on the rate paid of customers. Specifically, if a bank pays an above market
rate, such as 3 percent on NOWs as brokered deposits because the bank is viewed as
“buying the funds”. Banks that fund operations by marketing time deposits on the
internet suffer the same problem, as they generally pay rates paid by local
(Geographic) competitors.

3. Deposits held in foreign offices refer to same types of dollar –denominated demand
and time deposits discussed above except that balances are issued by a bank
subsidiary (owned by the bank holding company) located outside the United States.
The average foreign deposit balanced is generally quite large. Nonfinancial
 corporations engaged in international trade and governmental units own most of these
deposits.

4. Subordinate notes and debentures consist of notes and bonds with maturities in
excess of one year. Most meet requirements as bank capital for regulatory purposes.
Unlike deposits, the debt is not federally insured and claim of bond holders are
subordinated to claims of depositors. Thus, when a bank fails, depositors are paid
before subordinated debt holders. Other liabilities include acceptances outstanding
taxes and dividends payable, trade credit, and other miscellaneous claim.
Table Chart 2.1 Time Deposits Indexes of Commercial Bank in Bank Indonesia

From this chart above, we can say that the improvement of time deposit from year to year is
very good starting from October 2007 until February 2010. Actually, this improvement is
very influenced by increasing branch office of the banks, increasing trust of customer and
banks also give the product of deposits with the big prizes. Besides that, customer feel safety
because the product of government that is called LPS (Lembaga Penjamin Simpanan) which
is giving guarantee for the customer that put their money in the bank.

The most important factor that influences people to deposit their money in the bank is more
affected by internal factor from each person such as passion of investment, education, and
feeling safety. People will choose the best way to invest their money by doing deposit in the
bank than if they invest their money in stock market or money market. These conditions are
affected by fluctuation of money market and stock market so people are scare to save their
money in the bank. In around 2007 until 2010 occurred massive financial crisis in around the
world so it would affected also toward the increasing time deposit in the bank.

2.2 Inflation and Definitions

In economics, Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the price level rises, each unit of currency buys fewer
goods and services; consequently, inflation is also erosion in the purchasing power of money
– a loss of real value in the internal medium of exchange and unit of account in the economy.
A chief measure of price inflation is the inflation rate, the annualized percentage change in a
general price index (normally the Consumer Price Index) over time.

Inflation can have many effects that can simultaneously have positive and negative effects on
an economy. Negative effects of inflation include a decrease in the real value of money and
other monetary items over time; uncertainty about future inflation may discourage investment
and saving, or may lead to reductions in investment of productive capital and increase
savings in non-producing assets. E.g. selling stocks and buying gold. This can reduce overall
economic productivity rates, as the capital required to retool companies becomes more
elusive or expensive. High inflation may lead to shortages of goods if consumers begin
hoarding out of concern that prices will increase in the future. Positive effects include a
mitigation of economic recessions, and debt relief by reducing the real level of debt.

Economists generally agree that high rates of inflation and hyperinflation are caused by an
excessive growth of the money supply. Views on which factors determine low to moderate
rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations
in real demand for goods and services, or changes in available supplies such as during
scarcities, as well as to growth in the money supply. However, the consensus view is that a
long sustained period of inflation is caused by money supply growing faster than the rate of
economic growth.

Today, most mainstream economists favor a low steady rate of inflation. Low (as opposed to
zero or negative) inflation may reduce the severity of economic recessions by enabling the
labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap
prevents monetary policy from stabilizing the economy. The task of keeping the rate of
inflation low and stable is usually given to monetary authorities. Generally, these monetary
authorities are the central banks that control the size of the money supply through the setting
of interest rates, through open market.

Inflation is primary caused by an increase in the supply of money and credit. In fact, inflation
is the increase in the supply of money and credit. In American College Dictionary, the
definition of inflation is “Undue expansion or increase of the currency of a country especially
by the issuing of paper money not redeemable in specie”. In second definition by American
College Dictionary, inflation is substantial rise of prices caused an undue expansion in paper
money or bank credit.
The word” inflation” originally applied solely to the quantity of money. It meant that the
volume of money was inflated, blown up, over extended. It is not mere pedantry to insist that
the world should be used only in its original meaning. To use it mean” a rise in prices” is to
deflect attention away from the real cause of inflation and the real cure for it.

Keynesian economic theory proposes that changes in money supply do not directly affect
prices, and that visible inflation is the result of pressures in the economy expressing
themselves in prices. The supply of money is a major, but not the only, cause of inflation.
When the supply of money is increased, people have more money to offer for goods. If the
supply of money is increased, people have more money to offer for goods. If the supply of
goods does not increase or does not increase as much as the supply of money then the prices
of goods will go up. Each individual dollar becomes less valuable because there is more
dollars. A price is an exchange ratio between a dollar and a unit of goods. When people have
more dollars, they value each dollar less. Goods then rise in prices, not because goods are
scarcer than before, but because dollars are more abundant.

According to Bodie and Marcus (2001:331), inflation is the value where the price of good
and service commonly get rise. Inflation is one of the monetary events that showing tendency
of prices commonly, it means getting down the value of money. It happens because in the
society get increasing amount of money or money surplus based on quantity theory of money.

2.2.1Types of inflation
Based on qualitative difference:
It means classification based on difference situation. In this case we are divided into 3 stages
(Samuelson dan Nordhaus, 1998: 299), which are:

• Moderate Inflation

This type is happened when the prices increase slowly. We can say this inflation categorize as
moderate when the number is under 10 percent per year. In this situation the prices relatively
will not move far. People will not think more to use their money, because real interest rate is
not too low. If the inflation low, so the money will have interest rate close to nol, maximum
get real interest rate close to negative. Beside that the people will get more safety to do
transaction with using nominal value of money.

• Medium inflation

This type of inflation is happened if the prices increase 20, 100, or 200 percent per year. It
means this inflation is labeled with increasing of the prices huge sometimes double digit or
triple digit. This inflation is often called with two or three digit inflation. In this case if the
inflation becomes very serious so it will effect to economic condition become unstable.
Commonly the contracts of transaction is fastened on the prices of index and currency like ($)
dollar. People will lose their money quickly and also people will get real interest rate negative
50 or 100 percent per year. Therefore, people will not save their money in the bank although
in terms of minimum transaction. Money market will be bad and sometimes funds will
allocate more with sharing calculation interest rate. People are race also to overstock the
goods, buy property, land, and will not lend their money with high interest rate.

• Hyperinflation

This type is very dead inflation that was called hyperinflation. There are characteristics if this
inflation: there are speed of money cycles ( money is very fast when we get and spend)
increase very fast for example money will turn 30 times faster in the beginning of period and
the prices is very unstable relatively, and salary for people only change one percent or even
less from month to month. Hyperinflation is also known as runaway inflation or galloping
inflation. This type of inflation occurs during or soon after a war. This can usually lead to the
complete breakdown of a country’s monetary system. However, this type of inflation is short-
lived. In 1923, in Germany, inflation rate touched approximately 322 percent per month with
October being the month of highest inflation.

According to Keynes on General Theory of Employment, interest and Money, explained that
inflation is caused by gap between people economic power toward desires to buy goods
(Shapiro, 2002). The meaning of gap here is the demand of people on goods is bigger than
available so causing increase of prices. Then, in this case we know the terminology of
Inflationary gap. There are three major types of inflation, as part of what Robert J. Gordon
calls the "triangle model":

1. Demand-pull inflation is caused by increases in aggregate demand due to increased

private and government spending, etc. Demand inflation is constructive to a faster rate
of economic growth since the excess demand and favorable market conditions will
stimulate investment and expansion.

2. Cost-push inflation, also called "supply shock inflation," is caused by a drop in

aggregate supply (potential output). This may be due to natural disasters, or increased
prices of inputs. For example, a sudden decrease in the supply of oil, leading to
increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of
their costs could then pass this on to consumers in the form of increased prices.
 3. Built-in inflation is induced by adaptive expectations, and is often linked to the
"price/wage spiral". It involves workers trying to keep their wages up with prices
(above the rate of inflation), and firms passing these higher labor costs on to their
customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects
events in the past, and so might be seen as hangover inflation.

Sectoral Inflation: This is the fourth major type of inflation. The sectoral inflation takes
place when there is an increase in the price of the goods and services produced by a certain
sector of industries. For instance, an increase in the cost of crude oil would directly affect all
the other sectors, which are directly related to the oil industry. Thus, the ever-increasing price
of fuel has become an important issue related to the economy all over the world. Take the
example of aviation industry. When the price of oil increases, the ticket fares would also go
up. This would lead to a widespread inflation throughout the economy, even though it had
originated in one basic sector. If this situation occurs when there is a recession in the
economy, there would be layoffs and it would adversely affect the work force and the
economy in turn.

Fiscal Inflation: Fiscal Inflation occurs when there is excess government spending. This
occurs when there is a deficit budget. For instance, Fiscal inflation originated in the US in
1960s at the time President Lydon Baines Johnson. America is also facing fiscal type of
inflation under the presidentship of George W. Bush due to excess spending in the defense
sector.

Table Chart 2.2 Inflation Indexes of Commercial Bank in Bank Indonesia

From this graphic, we can see that the condition of inflations fluctuated during period
October 2007 until March 2010. Therefore, government issued policies to face crisis so that
the inflation still can be handled to keep the economic condition still stable because inflation
is the one of the important factors in Indonesia’s economic. Inflation started to be fluctuated
in beginning 2008. In that time, we got crisis that centered in USA and uncontrolled the price
of fuel. Because of that, the condition of economic almost each country in the world got the
impacts, included Indonesia.

In the crisis era, the commodity of food like CPO, cooking oil, wheat and gold also increase
uncontrolled. The stock market got decline so that the IHSG on the lowest position at the
time. That was very bad situation because Indonesia started to stand up after the crisis era in
1998. In around 2008 and 2009 is the dark economic. Government tried to keep the inflation
maximum 12% to decrease the probability failure of economic like happened in USA.
Indonesia is one of the successful countries that still survive toward crisis 2008 and 2009.

At the end of 2009 and beginning 2010 the inflation become stable because the economic
condition such as the price of fuel, IHSG, commodity and exchange rate started increase.

2.3 Interest Rate and Definitions

Interest rate is price of fund that can be borrowed (loanable funds), the nominal is determined
by preference and source of market and economic actor in market. Interest rate is not only
influenced by changing of preference economic actor in loan able case or loan able fund, but
also influenced by changing buying power of money. Because of market interest rate or valid
interest rate changes from time to time and interest rate from a lot of long term obligations is
determined in publication time, so the price of stocks will be changed based on changing
interest rate.

According to Karl and Fair (2001:635), interest is year interest payment from is particular
loan in the form of percentage from loan that we get from number of interest that we accept
every year divided by number of loan. Interest is the price from loan called as percentage of
main money per time unit. Interest is a price measurement of resources that used by debtor
which must be paid to creditor.

There are the functions of interest are:

• As a tractive power for depositor that have savings more to be invested
 • Interest can be used as a monetary tool to manage supply and demand of money in the
circulation of economic. For example government supported increasing of industry
sector so if companies from industry itself will borrow money, government must give
the interest lowers than other sector
• Government can use interest to control the number of money circulation. It means,
government can control the circulation of money in an economic.

Interest itself is determined by two powers, are: supply savings and capital investment
demand (especially from business sector). Saving is difference between income and
consumption. Interest is used as main supporter in order to desire saving, the number of
saving itself will be depended by high-low of interest. Higher interest, people will interest to
saving their money and vice versa. High-low offering of investment will be decided by high –
low interest deposit of people.

According to Lipsey, Ragan, and Courant (1997:471) interest rate is price that paid for unit of
currency that borrowed in the certain period of time. According to Lipsey, Ragan, and
Courant (1997:99-100) interest rate are differenced become two parts which are nominal
interest and real interest. Nominal interest rate is ratio between amounts of money that repaid
with amount of money that borrowed. Whereas, real interest rate is more emphasize on the
purchasing power ratio of money that repaid toward purchasing power of money that
borrowed. Real interest rate is difference nominal interest rate with inflation.

According to Samuelson and Nordhaus (1998) interest rate is payment of using amount
money. According to Nopirin (1992:176), the function of interest rate in economic is
allocation production factor to produce goods and services that used now and later.
According to Ramirez and Khan (1999), there are two factors that determined interest rate
which are internal and external. Internal factors include national income, amount of money
supply, and inflation. Whereas, external factors are foreign exchange rate and changing level
of foreign exchange that estimated.

2.3.1Types and Theories of Interest Rate

Nominal Interest Rate

Nominal interest rate will be changed if the elements are changed the most important thing is
each of them is influenced of different factors. Real interest rate is nominal interest rate
minus inflation in the same period of time.
Rr = R* - R i
Description:
R* = Real interest rate
Ri = Inflation rate
Ri is symbol for inflation rate that really happened in that period, whereas Ri* is inflation that
hoped in the same period of time (Boediono, 1990 : 6).

Keynes’s theory about interest rate

Interest rate is determined by interaction between real sector and monetary sector. Keynes’s
theory distinguishes the demand of money according to society’s motivation to retain it.
Keynes divides three motivations to retain money. First motivation is to transaction. The
second is to keep vigil and the thirds is speculative motivation, it means get benefits from
differentiations of interest rate.

Parity theory of interest rate

According theory of parity mechanism process, price level of goods and services or interest
rate in economic that relatively small and opening full toward world economic relation will
tend to be same with price level as well as interest rate in international market. Based on this
theory small economic and open like that cannot determine interest rate of price or interest
rate itself.

Parity interest rate

Foreign investment in current country can be organized as directly investment, portfolio
investment or deposit additions of public that wants to abroad in domestic bank. And the
other way, abroad investment by public influences the supply of currency in the certain
country and shift the curve of supply to the right. The amount of investment that flow to
domestic and to abroad from certain country depended on benefit rate of mentioned country
is relatively toward benefit rate in other country.

The addition of interest rate or profit that hoped in certain country cause increasing of
demand from the currency of certain country toward abroad investment additions and also
cause decreasing supply of the currency of that country from reducing public’s investment to
abroad.
The effect from that raising interest or profit that hoped cause appreciation of the currency
and the currency will increase the investment in that country and will affect the currency
itself become appreciation. Appreciation the currency in the future that hoped will affect the
currency increase like another asset (Salvatore, 1995 : 141).

According to Prasetiantono (2000: 99-101).related to interest rate is if interest is high,

automatically people will be prefer to save their money in the bank because they are hoped
high return of money payback. And in this position the demand of people to hold cash money
become lower because they are prefer to allocate their money into banking portfolio form
(deposits and savings). Along with decreasing of money supply, passion of shopping is also
decrease. Then, the price of goods and service will tend to stagnant or no inflation urge. On
the contrary, if interest rate is low, people tend to unenthusiastic again to save their money in
the bank.
Some aspects can explain the phenomena of high interest rate in Indonesia which is high
interest rate related to competency of banking sector that functions as an intermediary
institution, habit people to socialize and using banking service effectively are not high
enough, and get difficulty to decrease banking interest rate if inflation rate is always high.

Table Chart 2.3 Time Deposit Interest Indexes of Commercial Bank in Bank Indonesia

From this graphic, we can see that the condition of deposit interest fluctuated during period
October 2007 until March 2010. Therefore, government issued policies to face crisis so that
the interest rate can be handled to keep the economic condition still stable. Interest rate is the
one of the important factors in Indonesia’s economic. Interest started to be fluctuated in
beginning 2008. In that time, we got crisis that centered in USA and uncontrolled the price of
fuel. Because of that, the condition of economic almost each country in the world become
very badly, included Indonesia.
In 2008 sometimes the number of time deposits interest less than inflation. This means the
number of saving is increase but the power of money that we have is negative because the
gap of the inflation and also interest rate. For example, when we save our money in the bank
with interest 8%, we will get much money 8% than previous year in the next year. But when
the price is increase, the power of money that we have is not 8%. It depends on the inflation
that happened now. If the inflation is 4% so the power of money that we have is 4%.

In around 2008 and 2009, many people got loss their money from the bank. It caused
incapable of the bank to maintain their deposit and they also try to put their money in the
stock market so when the crisis happened they got loss much money. In Indonesia, there is
the bank that cannot maintain their liquid of money and they also put in the stock market so
they got loss much money and collapse now. Many people think that high interest, they will
get much money. In this situation interest rate must be balanced with the number of inflation.
 I. Methodology

3.1. Research Method

The author used quantitative research since data for this study is secondary data in form of
numbers. Quantitative research uses data that are structured in the form of numbers or that
can be immediately transported into numbers (Ross, 1999). In this study, quantitative
research aimed to figure out correlation of TD Position, TD Interest and Inflation to answer
the statement of problems exist in the first chapter. By using quantitative, numerical data can
be processed to prove and disapprove notion or hypothesis given previously.

3.2. Variables
One important element in quantitative analysis is variable. Variable is measurable quantity
that may vary or is subject to change (Render, 2006). Another definition of variable comes
from Cooper and Schindler (2006) in which it is a symbol of an event, act, characteristic,
trait, or attribute that can be measured and to which we assign categorical values. There are 3
variables used in this study, which is no independent and dependent variables since this study
aims to seek the correlation between 2 and more variables.

The author uses correlation method to answer the problem statements in the first chapter.
Correlation is a technique used to measure the strength of the relationship between 2
variables. It provides a measure of how well a least squares regression line fits the given set
of data and is concerned with describing the strength of the relationship between 2 variables
by measuring the degree of ‘scatter’ of the data values. The less scattered the data values are,
the stronger the correlation is said to be (Francis, 1998).

Another definition of correlation comes from Sugiyono (2008). Correlation is a numeral

figure to show direction and strength of relationship between 2 variables. The direction is
represented in form of negative or positive relationship while the strength is measured by
correlation coefficient. Correlation can exist in such a way that increases in the value of one
variable tends to be associated with increases in the value of other. This is known as positive
(or direct) correlation.
On the other hand, a correlation coefficient is normally represented by symbol r, lies between
-1 and +1, with r = +1 signifying ‘perfect’ positive correlation. A value of r = 0 signifies that
there is no correlation present, while the further away from 0 (towards -1 or +1) r is, the
stronger the correlation.

Besides correlation, partial correlation is also used to seek the correlation amongst 3 or more
variables since there are 4 variables used in this study. In probability theory and statistics,
partial correlation measures the degree of association between two random variables, with the
effect of a set of controlling random variables removed (Francis, 1998).

3.3. Research Time and Place

The study is conducted within October 2007 and March 2010, using secondary data which is
retrieved directly from reliable sources in internet (see appendix 3). Variables used in this
study are Outstanding (Position) of Time Deposits in Commercial Banks (y), Interest Rate of
Time Deposits in Rupiah by Commercial Bank (x1), Indonesian Inflation (x2). Table 3.1 in
the next page shows the sources of 4 different variables:
Table 3.1 Research Data Gathering
No Variable Source
Outstanding (Position) of Bank Indonesia
Time Deposits in http://www.bi.go.id/web/id/Statistik/Statistik+Ekonomi+dan+
1
Commercial Banks (2007- Keuangan+Indonesia/Versi+HTML/Sektor+Moneter/,
2010) TABEL1_22, retrieved July 06, 2010)
Bank Indonesia
Interest Rate of Time
http://www.bi.go.id/web/id/Statistik/Statistik+Ekonomi+dan+
2 Deposits in Rupiah (2007-
Keuangan+Indonesia/Versi+HTML/Sektor+Moneter/ , Tabel
20010)
TABEL1_33, retrieved July 06, 2009)
Bank Indonesia
(http://www.bi.go.id/biweb/Templates/Moneter/Default_Infla
si_ID.aspx?NRMODE=Published&NRORIGINALURL=
3 Indonesian Inflation %2fweb%2fid%2fMoneter%2fInflasi%2fData%2bInflasi
%2f&NRNODEGUID={A7760121-1768-4AE8-B333-
0C91E746F1E3}&NRCACHEHINT=Guest , retrieved July
06,2010)

3.4. Research Instruments

According to Kriyantono (2006), a research instrument is a supplementary tool that is chosen
and used by the researcher to make the research more systematic and easy to conduct.
3.4.1. Gathering Data
Base on Yin (1994) data may be collected as either primary or secondary. In the context of
this study and to achieve its purpose, secondary data were used. According to Uma Sekaran
(2000), secondary data defined as data that have already been gathered by researchers, data
published in statistical and other journals, and information available from any published or
unpublished source available either within outside the organization, all of which that is useful
for this study.

3.4.2. Data Processing Tool

In analyzing the data, the author used statistical software which is SPSS 16. By using SPSS
16, the process of test and calculation of the data can be constructed faster and easier than
using manual calculation

3.4.3. Research Framework

Research framework is design starts from collecting data until the results are gained and
interpreted that can be explained as follow:

Gathering
Data
Data
Processing
Analysis
SecondaryandData
Interpretation
using
from
SPSS
Internet
16of Result

Figure 3.1 Research Framework

To illustrate clearly the correlation and partial correlation among variables, design below can
be used:

From the figure above, there are several correlations that will be calculated:
1. Correlation between Outstanding (Position) of Time Deposits in Commercial
Banks (y) and Interest Rate of Time Deposits in Rupiah by Commercial Bank (x 1)
noted as ryx1.
2. Correlation between Outstanding (Position) of Time Deposits in Commercial
Banks (y) and Indonesian Inflation (x2) noted as ryx2.
 3. Partial correlation of Outstanding (Position) of Time Deposits in Commercial
Banks (y) with Interest Rate of Time Deposits in Rupiah by Commercial Bank
and Indonesia’s Inflation (x2); noted as ryx1x2.

3.5. Statistical Treatment

Seeing the research framework model above, the researcher uses several statistical statements
to answer the problem statement as follows:

3.5.1 Correlation
Correlation aims to find the relationship strength between 2 variables that is represented by
coefficient correlation by using formula in the next page (Francis, 1998):

……………… (3.1)

Where:
r : coefficient correlation
n : number of data
y : Cash Outstanding (Position) of Time Deposits
x : Indonesia’s Inflation or Interest Rate of Time Deposits

To interpret the results, table 3.2 shows the interval coefficient for categorizing the
correlation strength:

Table 3.2 Correlation Coefficient Interpretation

Coefficient Interval Correlation Strength
Positive (variables move Negative (variables move
in the same direction) in opposite direction)
0.00 until 0.199 0.00 until -0.199 Very weak
0.20 until 0.399 -0.20 until -0.399 Weak
0.40 until 0.599 -0.40 until -0.599 Average
0.60 until 0.799 -0.60 until -0.799 Strong
0.80 until 1.000 -0.80 until -1.000 Very Strong
Source: Sugiyono, 2008

3.5.2. Partial Correlation

Partial correlation measures the degree of association between two random variables, with the
effect of a set of controlling random variables removed (www.wikipedia.com). Partial
correlation is calculated by using below formula (Berenson, 2002):
 …….. (3.2)

3.5.3.Coefficient of Determination
The coefficient determination is the ratio of explained variation to total variation and is
obtained by squaring the value of r (the correlation coefficient). In words, the coefficient of
determination gives the proportion of all the variation (in the y-values) that is explained (by
the variation in the x-values) (Francis, 1998).

…….. (3.3)

Note: CD stands for Coefficient Determinant

r is for the coefficient correlation

3.5.4. F-test Hypothesis

F-test determines whether there is a significant correlation between variables (Berenson,
2002, p.564). Because there is more than 1 explanatory variables, the null and alternative
hypothesis are set up as follows:

a. Ho: ryx1 = 0 (There is no significant correlation between Outstanding (Position) of

Time Deposits in Commercial Banks with Interest Rate of Time Deposits in Rupiah
by Commercial Bank)
Ha: ryx1 ≠ 0 (There is significant correlation between Outstanding (Position) of Time
Deposits in Commercial Banks with Interest Rate of Time Deposits in Rupiah by
Commercial Bank)

b. Ho: ryx2 = 0 (There is no significant correlation between Outstanding (Position) of

Time Deposits in Commercial Banks with Indonesia’s Inflations)
Ha: ryx2 ≠ 0 (There is significant correlation between Outstanding (Position) of Time
Deposits in Commercial Banks with Indonesia’s Inflations)

c. Ho: ryx1x2 = 0 (There is no significant correlation of Outstanding (Position) of Time

Deposits in Commercial Banks with Interest Rate of Time Deposits in Rupiah by
Commercial Bank and Indonesia’s Inflation)
 Ha: ryx1x2 ≠ 0 (There is significant of correlation Outstanding (Position) of Time
Deposits in Commercial Banks with Interest Rate of Time Deposits in Rupiah by
Commercial Bank and Indonesia’s Inflation)

The F test statistic is equal to the regression mean square (MSR) divided by the error mean
square (MSE) that is represented by formula below:

……………. (3.3)

Where:

k = number of independent variables

F = test statistic from an F distribution with k and n-k-
1 degrees of freedom
The decision rule is: reject Ho at the α level of significance if F>FU (k, n-k-1); otherwise, do

not reject Ho. Here, F is from SPSS computation and FU (k, n-k-1) is from table (see appendix
4).
Nevertheless, the significant value in SPSS for F test shows the significance correlation level
of one variable to another as categorized in table 3.3 below:

Table 3.3 Level of Significance Value

Significance Value Significance Level
0.00-0.01 Highly significant
0.01-0.05 Significant
> 0.05 Not Significant
Source: SPSS guidelines

As correlation, partial correlation, coefficient determinant and F test have been done, the
author is able to analyze the data and answer problem statements exist in chapter 1.

IV. ANALYSIS OF DATA AND INTERPRETATION OF

RESULTS
4.1. Analysis of Data
There are 3 variables: Cash Position of Time deposits, Inflation and also Time deposit
interest. As explained before in chapter 3, data for these 3 variables lie within the period of
October 2007 – March 2010 monthly in ascending order (see appendix 3).

These data analyzed to find the correlation within variables that is constructed in a set of pair
to further answer problem statement in the first chapter. The set of correlation pair divided
into correlation and partial correlation as settled up in research framework in chapter 3 to
further be interpreted.

4.2. Interpretation Results

This study used 4 statistical treatments that are presented orderly in table to answer problem
statements in the first chapter. Correlation treatment is implied for finding correlation
between 2 variables while partial correlation one is implied for finding correlation amongst 3
variables. By using SPSS 16, results for correlation are figured out below:

4.2.1. Correlation between Cash Position of Time Deposits and Inflation

Correlation between Cash Position of Time Deposits and Inflation is noted by correlation
between y and x1 (ryx1).

Table 4.1 Correlation between Time Deposits and Inflations

 b
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Source: SPSS 16 output

From table above, it can be derived that the correlation between Cash Position of Time
Deposits and Inflations (ryx1) is .590. As it is closed to +1, the correlation between both
variables is average. It can be said that inflation has influence and significant toward cash
position of time deposit, vice versa.

According to Inflation theory, the higher Inflation of a country, the number of demand of
time deposit will decrease or vice versa. The lower of Inflation will increase the demands of
deposit in the bank. When inflation happened, the prices of goods and services become
increase. This condition will effect to the country and trust of people to save their money will
decrease. From the correlation result between cash positions of time deposits and inflation,
0.590 represents that theory is correlated enough with the study result. The increasing of
inflation correlates with the decrease of Indonesia’s inflation.

R square 0.349 represents that 34.9% change in variable cash position of time deposits can be
explained by changes in inflation, and the rest 65.1% can be explained by other variables
other than inflation.

F test which is 14.981 is higher than F table (FU 1, 30) which is 4.13. As F test is higher than F
table, Ho for hypothesis testing in F test number 1 is rejected and Ha is accepted. This also
explained by the significance figure in table 4.1 which is .001; meaning that there is highly
significant correlation between cash position of time deposits and inflation.

Inflation is the one of the important indicators to know the condition of economic from
October 2007 until March 2010. In that time, the condition of economic in the world was
fluctuated. Subprime mortgage crisis is the causal factor. In Indonesia also get the impact of
the crisis such us unemployment, many bank and big companies collapsed, stock market and
exchange rate fell down. From many impact that we can see, the impact also influence to
situation in Indonesia was started by increasing the price of oil so that it will influence also to
the commodity and industry in Indonesia. In Indonesia almost all the industry and commodity
depend on the price of fuel because the price of oil influences also to the price of production.
Therefore, the prices of daily needs become increase. This situation still happened until end
of 2008.

The most horrible condition of economic occurred in 2008. In that time subprime mortgage
become the causal factor of the crisis in the USA. Many industries like finance and
automotive become the victims from this massive crisis. Ford, GM, Lehman Brothers, Freddy
Mae, Merrill Lynch, AIG are the some of the victims of the vicious crisis happened. This
crisis started when the banks in America brave to give the house credit. Finally, many people
can’t pay and banks can’t be able to give the collateral.

Inflation is the monetary situation that describing increasing price of goods and services. In
law of economic, the position is described with supply and demand position. Inflation can be
caused by two things such as demand pull or exhortation production cost. Demand pull
inflation is happened by excessive demand so the price will change. Increasing demand of
goods and services will add the demand of production factors so that the price of production
factors increase. So this inflation happened when the economic in the full of employment and
cost push inflation caused by production cost ( input) and impacted also toward the price of
the products (output) become increase.

The increasing of inflations becomes the standard of the condition of economic in Indonesia
especially. In Indonesia government must be able to manage the national production to fulfill
the national daily needs and increasing addicted import commodity goods. In export policy,
government is perceived that only for his business. Finally, when the export and import
policy is unbalanced, people become suffer because of it.

Some factors that influence increasing the prices of principle commodity can’t be separated
with the economic recession factors that centered in USA. Subprime mortgage (housing loan)
and increasing of oil is still become the important factors that influence the economic
situation in the world. Energy crisis (oil, gas, coal) was started with increasing the price of oil
in international market. The price of oil ever come out until 117US $/barrel, but finally
become 82 US$/barrel in October 2008. This was caused demand of oil decreased and
economic crisis in USA.

Because the increasing of oil price will force industry and economic sector to increase the
production cost, as a consequence the commodity and output in the high of price. This was
still happening until now. Whereas, in other side the impact of global warming had destroyed
the environment for human being in the world such as storm, flood, landslide. These factors
will influence almost the agriculture and transportation sectors so that the productions also
become more expensive than before.

Everything will be connected each other then crisis economic become the crisis economic
that influence the stability of economic in the world especially in Indonesia. Because the
position of USA as a central of economic in the world so it will impacted to the export market
in the world included Indonesia. Indonesia export is very dependent to the USA market
because the export of Indonesia is the biggest after Japan as the destination export of
Indonesia. So this is why Indonesia also got the impacts of this economic crisis. Indonesia is
very connected toward the crisis in USA and the crisis will influence the consumption the
condition of economic each country. Because this crisis will also decrease the consumption
and finally influence the export value and economic growth is also decrease.
In Indonesian financial market, the crisis is very massive because the supply money in
financial market and money market are dominated by the funds from abroad. In financial
market is the place for hot money which can go every time and impacted to the exchange
rate. In October 2008, rupiah felt down until Rp. 11.700 toward 1$ USD. It happened because
the demand of dollar increases than rupiah. People believed that the value of dollar is bigger
than rupiah so people tend to buy dollar in financial market.

In other side when the rupiah decrease, the banking credit become higher and influence
directly to companies financial in term of paying credit. In addition, if the companies import
the raw material from abroad so the cost production will increase also seeing that dollar as
instrument transaction.

From the explanations above, we can conclude the impacts of the economic in Indonesia such
as:
1. Global crisis will cause instability national macroeconomic. It was started by the
economic growth decrease because the demands of domestic products by customer
from abroad decrease also. This case will influence the production cost so that
company decrease the load with doing fired for the employees in large scale. This is
done by companies to avoid the collapse and maintains the asset. In this situation,
unemployment is everywhere so influence also the inflation. Because the inflation is
increase so the interest rates also increase. If the interest rate and inflation increase so
costs of house hold increase also. It will be problem for the people if the prices of
commodity increase but the revenue of household constant.

2. The impact of global crisis also influences the national industry direct or indirectly.
For the industry companies, the increasing of fuel will effect to the increasing of
production cost. So, this will also impact to the increasing the domestic and import
component cost (raw material). This increase will also impact to the transportation
cost and distribution route.

3. After the effect of economic global influence the economic condition, the inflation
and commodity price are also increase. The increasing of fuel will impact the real
income household. The consumption and domestic investment will decrease and
finally the demand of time deposit, savings, money market and stock market unstable.
This condition will also increase the unemployment and economic growth decrease.
4.2.2. Correlation between Cash Position of Time Deposits and Time Deposit Interest
Correlation between Cash Position of Time Deposits and Time Deposit Interests is noted by
correlation between y and x2 (ryx2).

Table 4.2 Correlation between Time Deposits and Time Deposit Interests
b
R
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a.0F
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9604q
P
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I
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Source: SPSS 16 output
The correlation between Cash Position of Time deposits and Time Deposit Interests (ryx2) is
0.046. It shows that there is very weak correlation between both variables. There is almost no
correlation between Cash Position of Time deposits and Time Deposit Interests.

According to Interest Rate theory, people will put their money in the bank if the interest is
high. It can be said that higher interest rate, the number of deposits will increase. In fact,
higher time deposit interest not really effect to demand of time deposits. This case is affected
by unstable condition like politic. Although banks itself give high interest but people are
scare to put and save their money in the bank. From the correlation result between Time
Deposits and Time Deposit Interest, 0.046 represents that theory is not similar with the study
result. The increasing Time deposit interests don’t correlate with the increasing Cash Position
of Time Deposits.

R square 0.002 represents that time deposits interests doesn’t explain or determine Cash
Position of Time Deposits. F test which is 0.060 is lower than F table (FU 1, 30) which is 4.13.
As F test is lower than F table, Ho for hypothesis testing in F test number 2 is accepted and
Ha is rejected. This is also explained by the significance figure in table 4.3 which is .809;
meaning that there is no significant correlation between Cash Position of Time Deposits and
Time Deposit Interests.

The decreasing of banking loan interest rate can be happened, if Bank of Indonesia makes the
policy to decrease deposit interest together to all banks in Indonesia. Interest rate of Bank of
Indonesia (BI Rate) will influence banking income, but actually loan interest rate is
determined by cost that issued by banks. The components of banking loan interest are
determined by cost of fund, operational cost, and determining margin bank aggregate.

Cost of fund or cost of customer saving will effect to aggregate of loan interest rate from 5
until 6 percent. It consists of paying saving interest, deposit, and gyro. Operation cost
influence 2 until 5 percent from loan interest. If the bank is aggressive in marketing like
giving prizes so operation cost become bigger also.

Risk premium or risk of aggregate which is faced by banking has two steps, which are risk in
industry and risk in company. In the competition of free trade, textile sector have biggest risk.
This risk premium is influenced by the number of loan interest rate with amount of 1 until 7
percent. Sometimes banks use risk rating customer to avoid non performing loan. And the
last is margin making by the bank itself. The margin determines 1 until 2 percent from the
banking loan interest. If the bank of Indonesia makes the rule with determining the interest
rate, it will not also make the bank decrease their standard of interest rate because of the risk
premium and cost of fund.

The relation of interest rate and saving are positive, according to classic theory, higher
interest rate, people will think to invest their money in the bank. It means that in the position
of high interest rate people will be motivated by decreasing or sacrificing their consumptions
to add their deposits in the bank. So, when many people go to bank for saving, the number of
savings of the banks will also increase. If this condition happened, banks will be more
superior because they can give the credit to the companies so economic role can run well.

The condition of deposit interest was got fluctuated during period October 2007 until March
2010. Interest rate is the one of the important factors in Indonesia’s economic. Interest started
to be fluctuated in beginning 2008. In that time, we got crisis that centered in USA and
uncontrolled the price of oil. Because of that, the condition of economic almost each country
in the world become very badly, included Indonesia.

In around 2008 and 2009, many people got loss their money from the bank. It caused
incapable of the bank to maintain their deposit and they also try to put their money in the
stock market so when the crisis happened they got loss much money. In Indonesia, there is
the bank that cannot maintain their liquid of money and they also put in the stock market so
they got loss much money and collapse now. Many people think that high interest, they will
get much money. In this situation interest rate must be balanced with the number of inflation.

In 2008 sometimes the number of time deposits interest less than inflation. This means the
number of saving is increase but the power of money that we have is negative because the
gap of the inflation and also interest rate. For example, when we save our money in the bank
with interest 8%, we will get much money 8% than previous year in the next year. But when
the price is increase, the power of money that we have is not 8%. It depends on the inflation
that happened now. If the inflation is 4% so the power of money that we have is 4%.

In development of time deposit interest and inflation, there are positive correlation which are
the interest will followed inflation in determining the standard of interest. Because time
deposit interest and inflation is very significant to time deposit amount so these factors
become the indicators to know the growth of economic condition in certain country
especially in Indonesia.