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

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  • Massomeh Hajilee

    (University of Houston-Victoria)

  • Farhang Niroomand

    (University of Houston-Victoria)

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.

Suggested Citation

  • Massomeh Hajilee & Farhang Niroomand, 2018. "The impact of interest rate volatility on financial market inclusion: evidence from emerging markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 352-368, April.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:2:d:10.1007_s12197-017-9422-x
    DOI: 10.1007/s12197-017-9422-x
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    Cited by:

    1. Massomeh Hajilee & Farhang Niroomand & Linda A. Hayes, 2023. "The relationship between interest rate volatility and the shadow economy in OECD countries: An asymmetric analysis," Australian Economic Papers, Wiley Blackwell, vol. 62(3), pages 539-566, September.
    2. Kizito Uyi Ehigiamusoe & Mohamad Shaharudin Samsurijan, 2021. "What matters for finance‐growth nexus? A critical survey of macroeconomic stability, institutions, financial and economic development," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5302-5320, October.
    3. Smail Tigani & Hasna Chaibi & Rachid Saadane, 2019. "Gaussian Mixture and Kernel Density-Based Hybrid Model for Volatility Behavior Extraction From Public Financial Data," Data, MDPI, vol. 4(1), pages 1-11, January.
    4. Hajilee, Massomeh & Stringer, Donna Y. & Hayes, Linda A., 2021. "On the link between the shadow economy and stock market development: An asymmetry analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 303-316.
    5. Hajilee, Massomeh & Niroomand, Farhang, 2021. "Is there an asymmetric link between the shadow economy and the financial depth of emerging market economies?," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).

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    More about this item

    Keywords

    Interest rate volatility; Nonlinear approach to ARDL; Asymmetric effect; Financial market inclusion; Emerging economies;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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