Term Structure Inversion and Monetary Policy Transmission in a Dual Banking System: Evidence from Indonesia

Using tenor-disaggregated monthly data from June 2014 to February 2024 from Indonesia’s dual banking system, we provide evidence that deposit repricing is pinned at the short end of the maturity spectrum. The Islamic 12-month deposit rate is cointegrated with the Islamic 1-month rate (p = .000) but not with the tenor-matched conventional 12-month rate (p = .070). The ECM shows strong positive short-run pass-through (β1 = 0.835, p < .001) and weakly negative long-run pass-through (β2 = −0.074, p = .012), with an error correction speed of −0.334. The Islamic term structure is inverted in 91% of months, while the conventional term structure is upward sloping in 87%. Inversion is robust across seven of eight phases of the monetary policy cycle, multiple structural break tests, and alternative specifications including an ARDL bounds test that confirms cointegration at 1%. The findings imply an internal transmission channel governing competition between deposit markets and monetary policy effectiveness in Indonesia’s dual banking system.