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Volume :35 Issue : 135 2009      Add To Cart                                                                    Download

Determinants of Interest Rates in Kuwait

Auther : Dr. Husain A. AL-Omar

     This paper is an attempt to study the importance of domestic factors in the behavior of domestic interest rate on both KD and US Dollar deposits in Kuwait is an example of a developing small open economy.  To achieve this goal the study employed VAR technique, using monthly data for the period from 1993 to 2006, and five domestic variables including interest rate on both KD and US Dollar deposits, the discount rate, local banks funds at the Central Bank, and the Kuwaiti Dinar exchange rate against the US Dollar.

     The results indicate that domestic factors are responsible for 49% to 65% of the variation in interest rate on both US Dollarand KD deposits respectively, and that discount rate comes first followed by local bank funds then exchange rate.  The results indicate that the discount rate has a positive impact on domestic interest rate while local bank funds and exchange rate both have a negative impact.  These results indicate a scope for domestic monetary policy to affect domestic variables despite the high degree of openness of the Kuwaiti economy.

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