The Dynamic Impacts of Interest Rate Volatility and Spillover Effect of the U.S. Policy Rate on the Banking Sector Development: Evidence from Selected Emerging Economies

This thesis aims to investigate the dynamic impacts of local interest rate volatility and spillover effect of the U.S. policy rate on the banking sector development (BSD) of emerging countries during the period of 1980-2014. The bounds testing within the autoregressive distributed lag (ARDL) framework is employed using annual data. In addition, the Toda-Yamamoto of causality analysis has also been utilized. The findings suggest that the banking sectors of emerging countries are vulnerable to both local and international interest rates risks. The empirical results indicate that both local interest rate volatility and the U.S. policy rate have negative impacts on the majority of the suggested BSD indicators. These impacts continue to play a significant role in dampening path of the long-term convergence process for the BSD. The outcomes of causality analysis reveal that the U.S. monetary policy affects the BSD of the emerging countries through real interest rate channel. Therefore, these results could have important implications for policymakers to improve the banking systems and to promote economic growth in the sampled emerging economies.