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The impact of interest rate volatility on financial market inclusion: evidence from emerging markets

Massomeh Hajilee and Farhang Niroomand ()
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Massomeh Hajilee: University of Houston-Victoria
Farhang Niroomand: University of Houston-Victoria

Journal of Economics and Finance, 2018, vol. 42, issue 2, 352-368

Abstract: Abstract Interest rate uncertainty adversely affects financial market performance and, eventually, economic growth. This study investigates the relationship between interest rate volatility and financial market inclusion for five selected emerging economies over the period 1980–2015. To do this, we assess the long-run and short-run relationship using Pesaran et al. (J Appl Econ 16:289–326, 2001) bounds testing approach to cointegration and error-correction modeling and Shin et al. (2014) nonlinear cointegration estimation method (NARDAL). The latter method incorporates nonlinearity into the model and enables us to check the asymmetric effects of interest rate variability on financial market inclusion. The findings of our linear models indicate that short-run symmetric effects lead to long-run symmetric effects in four countries (Turkey is the exception) and there is a long-run symmetric effect for the other four countries. On the other hand, estimation of nonlinear models shows the short-run existence of asymmetric effects for all five emerging economies. We found that the long-run effect of interest rate volatility is asymmetric in all countries except for Mexico. We suggest that this group of countries should cautiously pay attention to laws and regulations related to their financial market and interest rate policies. Our estimation results show that interest rate uncertainty significantly affects financial market inclusion and has an important role in financial market development and eventually achieving higher economic growth.

Keywords: Interest rate volatility; Nonlinear approach to ARDL; Asymmetric effect; Financial market inclusion; Emerging economies (search for similar items in EconPapers)
JEL-codes: E43 G28 O16 (search for similar items in EconPapers)
Date: 2018
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