Dynamic impact of interest rate volatility and spillover effect of the US interest rate on banking sector development of Turkey: empirical evidence from cointegration and causality analysis*

Abstract

This article investigates the dynamic impacts of interest rate volatility and the spillover effect of the US' interest rate on the development of Turkey's banking sector. It employs the bounds test within autoregressive distributed lag framework and the conditional Granger causality. The empirical results showed that the banking sector development was negatively affected by the interest rate volatility in both short- and long-terms. The study's findings revealed that the US' interest rate affected the development of the Turkish banking sector through real interest rate channel which confirm existence of such spillover impacts. The findings are consistent with the policy actions of the Central Bank of Turkey.