This thesis investigates the determinants of financial development in Turkey. Principle Component Analysis (PCA) is employed in order to examine the main determinants of financial sector development and shed light on the structure of the financial system in Turkey. The empirical studies on financial development suffer from the measurement problem. This study aims to remedy the measurement problem by providing proxies that explain different aspects of financial development more accurately than other proxies used in the extant literature. Hence, the present study constitutes a strong basis for studies that rely on measuring financial development in Turkey.

The economic literature posits that a well-functioning economy requires a well-regulated financial system, and a sound financial system is essential to the fundamentals of an economy, however, even the most influential economists disagree sharply about the role of the finance-growth relationship in economic development. One of the most important questions concerning financial openness is whether it spurs long-run economic growth, and if yes, do these benefits outweigh the risks for developing countries. In addition, the conventional economic theory often postulates that a more developed financial sector provides a productive ground for higher economic growth. Is financial development a major prerequisite for economic growth? Additionally, institutional quality has also received a considerable attention since it is thought of a significant channel in the financegrowth relationship. This thesis aims to investigate the links between financial integration, financial development, and growth, taking institutional quality and the level of the development of the economy into consideration. To this end, a large panel data set is used and panel data estimation techniques are employed. The results show that emerging economies benefit the most from financial openness regardless of any preconditions. On the other hand, developing economies should be cautious since financial openness may hinder growth unless institutional development is healed before financial openness policies take speed. Moreover, the results indicate that, financial development fosters growth and the level of institutional development is an important determinant of the finance-growth relationship in the overall.

This paper investigates the relationship between economic growth, and remittances, financial development, and globalization after controlling for different levels of international financial distress. We study four of the major remittances recipient countries individually over the period of 1976 to 2012 using an autoregressive distributed lag method (ARDL). The results show that in Mexico, Bangladesh, and India remittances work as a stabilizing factor on their economies. Significant results of a positive long run correlation between remittances and GDP levels are also found in the results of Bangladesh and Mexico. High levels of financial distress have a negative impact on GDP in Mexico. We conclude that the level of financial integration between economies affect how financial distress in one economy spills over to another. This paper also finds that in the short run when globalization increases, uncompetitive businesses are outrivaled in Mexico and in Bangladesh, due to big neighbors like the United States or China and India. For Bangladesh, the financial development is destabilizing in the short run, and in the long run it correlates negatively with GDP. For India, this study finds that higher levels of both financial development and globalization promote long term economic growth. For China, few conclusions are drawn.

This thesis consists of four essays on finance and the real economy. Chapter 1 studies the effect of banking crises on the composition of investment. It builds a partial equilibrium growth model with a banking sector and two types of investment projects: a safe, low return technology and an innovative, high productivity one. Investments in innovation are risky since they are subject to a liquidity cost which entrepreneurs cover by borrowing from the banking sector. When bank creditors are sufficiently pessimistic about the aggregate liquidity needs of the real sector, they will run on the bank and cause a credit freeze. This leads banks to tighten credit supply after the crisis, which decreases disproportionately investment in innovation and slows down economic growth. An empirical investigation, employing industry-level data on R&D investment around 13 recent banking crises, confirms this hypothesis. Industries that depend more on external finance, in more bank-based economies, invest disproportionately less in R&D following episodes of banking distress. These industries also have a relatively lower share of R&D in total investment, suggesting a shift in the composition of investment after the crisis. Such differential effects across sectors imply that the drop in R&D spending is, at least partially, the result of the contraction in credit supply.Chapter 2 studies the impact of coordination frictions in financial markets on the cost of capital. In the model, a financial intermediary seeks to raise funds to finance a risky capital-intensive project. Capital is owned by a large number of small investors, who observe noisy signals about the project's implementation cost. Employing a global games equilibrium refinement, we characterize a unique threshold equilibrium of the coordination game between investors. We then show that the relationship between the probability of success of the project and the rate of return on capital is non-monotonic. There exists a socially optimal price of capital, which maximizes the probability that the project is profitable. However, fee-maximizing intermediaries will generally set an interest rate that is higher than the socially optimal rate. The model best characterizes project finance investments funded through the bond market.Chapter 3 proposes a laboratory experiment to study the impact of partial deposit insurance schemes on the risk of deposit withdrawals. In the experiment, depositors decide whether to withdraw or leave their money in a bank, triggering a default when too many participants choose to withdraw. When a bank run occurs, the amount of wealth each depositor can recover depends on the number of withdrawals and a deposit insurance fund whose size cannot cover in full all depositors. We consider two treatments: (i) a perfect information case when depositors know the size of the insurance fund and (ii) a heterogeneous information setting when they only observe noisy signals about its size. Our results show that uncertainty about the level of deposit coverage exerts a significant impact on the propensity to run. The frequency of runs is relatively high in both treatments. A majority of subjects follow a threshold strategy consistent with a risk-dominant equilibrium selection. Finally, the last chapter re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between finance and growth for 22 advanced economies. Our time series analysis suggests that the evidence in support of a finance-led growth is weak once we take into account the dynamics of financial and economic development. We show that, causality patterns depend on whether countries' financial development stems from the stock market or the banking sector. / This thesis consists of four essays on finance and the real economy. Chapter 1 studies the effect of banking crises on the composition of investment. It builds a partial equilibrium growth model with a banking sector and two types of investment projects: a safe, low return technology and an innovative, high productivity one. Investments in innovation are risky since they are subject to a liquidity cost which entrepreneurs cover by borrowing from the banking sector. When bank creditors are sufficiently pessimistic about the aggregate liquidity needs of the real sector, they will run on the bank and cause a credit freeze. This leads banks to tighten credit supply after the crisis, which decreases disproportionately investment in innovation and slows down economic growth. An empirical investigation, employing industry-level data on R&D investment around 13 recent banking crises, confirms this hypothesis. Industries that depend more on external finance, in more bank-based economies, invest disproportionately less in R&D following episodes of banking distress. These industries also have a relatively lower share of R&D in total investment, suggesting a shift in the composition of investment after the crisis. Such differential effects across sectors imply that the drop in R&D spending is, at least partially, the result of the contraction in credit supply.Chapter 2 studies the impact of coordination frictions in financial markets on the cost of capital. In the model, a financial intermediary seeks to raise funds to finance a risky capital-intensive project. Capital is owned by a large number of small investors, who observe noisy signals about the project's implementation cost. Employing a global games equilibrium refinement, we characterize a unique threshold equilibrium of the coordination game between investors. We then show that the relationship between the probability of success of the project and the rate of return on capital is non-monotonic. There exists a socially optimal price of capital, which maximizes the probability that the project is profitable. However, fee-maximizing intermediaries will generally set an interest rate that is higher than the socially optimal rate. The model best characterizes project finance investments funded through the bond market.Chapter 3 proposes a laboratory experiment to study the impact of partial deposit insurance schemes on the risk of deposit withdrawals. In the experiment, depositors decide whether to withdraw or leave their money in a bank, triggering a default when too many participants choose to withdraw. When a bank run occurs, the amount of wealth each depositor can recover depends on the number of withdrawals and a deposit insurance fund whose size cannot cover in full all depositors. We consider two treatments: (i) a perfect information case when depositors know the size of the insurance fund and (ii) a heterogeneous information setting when they only observe noisy signals about its size. Our results show that uncertainty about the level of deposit coverage exerts a significant impact on the propensity to run. The frequency of runs is relatively high in both treatments. A majority of subjects follow a threshold strategy consistent with a risk-dominant equilibrium selection. Finally, the last chapter re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between finance and growth for 22 advanced economies. Our time series analysis suggests that the evidence in support of a finance-led growth is weak once we take into account the dynamics of financial and economic development. We show that, causality patterns depend on whether countries' financial development stems from the stock market or the banking sector.

[pt] A dissertação analisa como a inflação afeta a expansão do sistema financeiro. O Brasil oferece uma oportunidade de pesquisa peculiar, pois conviveu por muitos anos com inflação superior a 1.000% a.a. e que caiu abruptamente a ponto de, pouco mais de um ano depois do bem-sucedido plano de estabilização, estar próxima a 10%. O resultado principal é que com inflação elevada, os bancos expandem agências mais interessados em captação vis-à-vis crédito. Por outro lado, com a inflação controlada os bancos passam a ter mais interesse no crédito. Os dados sugerem ainda que houve uma mudança no padrão de expansão das variáveis financeiras (agência, crédito e captação) com relação às características dos municípios como tamanho de mercado, posição geográfica, nível de desenvolvimento e infraestrutura. Esta evidência reforça a tese de que o sistema financeiro brasileiro passou por uma mudança estrutural com o fim da inflação. A dissertação enfatiza a importância do ambiente institucional para o desenvolvimento do mercado de crédito. / [en] This dissertation analyzes the effects of inflation on the expansion of the financial system. To this end, Brazil provides a singular opportunity for research as the country experienced inflation of more than 1,000% per year for many years followed by an abrupt drop. Slightly more than a year after implementation of a successful stabilization plan it was close to 10%. The main result is when inflation is high, banks expand their branch network, more interested as they are in capturing funds as opposed to granting credit. On the other hand, when inflation is under control, banks begin to focus more on credit. The data also suggest that there was a change in the growth pattern of financial variables (branch, credit, and CD issuing) as related to characteristics of the municipalities such as market size, geographical location, level of development, and infrastructure. This evidence reinforces the premise that the end of inflation prompted structural change in the Brazilian financial system. The dissertation emphasizes the importance of the institutional environment for the development of the credit market.

nÃo hà / O presente trabalho busca investigar eventual relaÃÃo entre o desenvolvimento financeiro e desigualdade de renda. Para tal, foram utilizados os dados dos 184 municÃpios cearenses, para o ano de 2010, firmando-se como medida de desigualdade o Ãndice de Gini e, como variÃveis explicativas, as razÃes estabelecidas entre crÃdito e PIB, entre operaÃÃes de crÃdito e PIB; entre operaÃÃes de crÃdito e populaÃÃo; entre financiamentos e PIB e, por fim, entre financiamentos e populaÃÃo, como proxies para o desenvolvimento financeiro. Foi utilizado o mÃtodo denominado Jackknife Model Averaging, que se caracteriza por ser um procedimento de estimaÃÃo que leva em consideraÃÃo todas as possÃveis especificaÃÃes de modelo com base em um conjunto de variÃveis. Empregou-se, ainda, a abordagem FMA, sugerida em Hansen e Racine (2012). Os resultados obtidos indicam que o desenvolvimento financeiro nÃo à estatisticamente relevante para interferir na reduÃÃo da desigualdade de renda. / This work seeks to investigate an eventual relationship between financial development and income inequality. For this, was used data from 184 cities from CearÃ, at the year of 2010, Using as a measure of inequality, the Gini index and, as explanatory variables, the reasons established between credit and GDP, between credit and GDP operations; between credit and population operations; between financing and GDP and, finally, between funding and population, as proxies for financial development. Was used the method called Jackknife Model Averaging, which is characterized by being a procedure of estimation that takes into account all possible model specifications based on a set of variables. We used also the FMA approach suggested in Hansen and Racine (2012). The results indicate that financial development is not statistically relevant to interfere in reducing income inequality.

Este estudo analisa os efeitos do sistema financeiro, caracterizado tanto em termos de desenvolvimento financeiro quanto por sua estrutura financeira, sobre as decisões de investimento e restrições financeiras de firmas brasileiras. Dessa forma, este trabalho investiga como o desenvolvimento financeiro afeta o comportamento das firmas e que tipo de estrutura financeira, isto é, se market-based ou bank-based, prepondera na condução do investimento corporativo e na redução das restrições financeiras das firmas. A relevância deste estudo reside em seu caráter original conduzido a partir da análise de um tema ainda pouco explorado na literatura nacional. A investigação é realizada dentro de um contexto teórico e aplicado e assumindo que o sistema financeiro exerce impacto substancial sobre as decisões de investimento. Com o propósito de contribuir para a escassa literatura internacional e à exígua literatura para o Brasil são consideradas neste estudo informações de 404 firmas brasileiras para o período de 1998 a 2006. A fim de identificar a presença de restrição financeira no comportamento da firma e para controlar e separar seus efeitos de outros fatores nas decisões de investimento, as firmas da amostra são classificadas segundo os índices de restrição financeira KZ e WW. A partir do emprego de dados macroeconômicos em uma análise microeconômica, é estimada uma versão do modelo acelerador do investimento pelo método GMM-system para analisar os efeitos do sistema financeiro sobre os investimentos corporativos. Os resultados sugerem que para firmas financeiramente não restritas o impacto do desenvolvimento financeiro sobre as decisões corporativas ocorre de forma direta, conduzindo a maiores investimentos. Já para firmas financeiramente restritas este efeito ocorre de forma indireta. Nesse caso, um maior desenvolvimento financeiro reduz a dependência dessas firmas por recursos internos para investir e aumenta a resposta de seus investimentos às oportunidades de crescimento. Evidências também são encontradas de que a estrutura financeira exerce influência sobre os investimentos de firmas financeiramente restritas, mesmo após os resultados serem controlados pelo nível de desenvolvimento financeiro. Este resultado aponta para a relevância de um sistema financeiro baseado em mercados para atenuar as restrições financeiras de firmas restritas. Os resultados também sugerem que na presença de oportunidades de crescimento um sistema financeiro baseado em mercados destaca-se ao permitir que a resposta do investimento das firmas a um aumento da demanda seja maior que em um sistema baseado em bancos. / This study analyzes the effects of the financial system, characterized both in terms of financial development as also by its financial structure, on the investment decisions and financial constraints of Brazilian firms. Thereby, this work investigates how the financial development affects a firm\'s behavior and which kind of financial structure, that is, if market-based or bank-based, prevails in driving corporate investment and in reducing a firms\' financial constraints. The relevance of this study lies on its original feature carried from the analysis of a topic not much explored in the national literature. The research is conducted within a theoretical and applied context and by assuming that the financial system exerts substantial impact on investment decisions. In order to contribute to the scarce international literature and to the limited literature for Brazil this study considers information on 404 Brazilian firms over the 1998-2006 period. With the aim to identify the presence of financial constraint on firm behavior and control and separate its effects from other factors on investment decisions, the firms are classified according to the KZ and WW financial constraint indexes. Through the use of macroeconomic data in a microeconomic analysis, a version of the accelerator investment model is estimated by the GMM-system method to analyze the effects of the financial system on corporate investments. The results suggest that for financially unconstrained firms the impact of financial development on corporate decisions is direct, leading to higher investments. On the other hand, for financially constrained firms this effect occurs in an indirect way. In this case, a higher financial development reduces the investment dependence of these firms on internal resources and increases the response of investment to growth opportunities. Evidence is also found that the financial structure affects the investment of financially constrained firms, even after the results are controlled for the level of financial development. This result points to the relevance of a market-based financial system for mitigating the constrained firms\' financial constraints. Results also suggest that in the presence of growth opportunities the response of a firm\'s investment to the increased demand is higher in a market-based financial system than in a bank-based one.

Este trabalho tem como objetivo examinar os efeitos do desenvolvimento financeiro e das restrições financeiras nas decisões de investimento da firma considerando um conjunto de informações de 659 firmas brasileiras no período de 1998 a 2006. A investigação é realizada dentro de um contexto teórico e aplicado, considerando um modelo econométrico com dados longitudinais e assumindo que o desenvolvimento financeiro exerce impacto substancial nas restrições financeiras das firmas, o que está diretamente relacionado às suas decisões de investimento. Com o propósito de contribuir para a escassa literatura internacional e à inexistente literatura para o Brasil, este trabalho utilizou o índice KZ para classificação das firmas como financeiramente restritas e não restritas. Por meio do uso de dados macroeconômicos em uma análise microeconômica, empregou-se o modelo probabilístico logit para encontrar os principais fatores determinantes da probabilidade de restrição financeira das firmas brasileiras. Já para analisar a relação entre desenvolvimento financeiro, restrições financeiras e investimento da firma, estimou-se uma versão do modelo acelerador do investimento pelo método dos momentos generalizados (GMM) devido seu caráter dinâmico e à presença do problema de endogeneidade. Os principais resultados indicaram que, além dos fatores associados à estrutura financeira da firma, fatores como o nível de desenvolvimento financeiro e a taxa de juros de longo prazo têm influência sobre a probabilidade de restrição financeira da firma. Medindo-se a dependência das firmas por recursos internos por meio da sensibilidade do investimento ao fluxo de caixa, os resultados também indicaram que o desenvolvimento financeiro é mais importante para as firmas consideradas financeiramente restritas ao reduzir sua dependência por recursos internos, diminuindo seu grau de restrição financeira. Maiores níveis de desenvolvimento financeiro também se apresentaram associados a maiores taxas de investimento e a uma melhor alocação de capital no caso de firmas identificadas como financeiramente restritas. Esses resultados apresentaram-se robustos mesmo ao se controlar os resultados pela taxa de crescimento econômico, por diferentes variáveis de desenvolvimento financeiro e ao se classificar as firmas por intensidade de capital e taxa de investimento. / The aim of this work is to examine the effects of financial development and financial constraints on firm\'s investment decisions using data from 659 Brazilian firms over the 1998-2006 period. The research is conducted within a theoretical and applied context, considering an econometric model with longitudinal data and assuming that the financial development exerts a substantial impact on firms\' financial constraints, which is directly related to their investment decisions. With the aim of contributing to the scarce international literature and to the inexistent literature for Brazil, this study used the KZ index to classify firms as financially constrained and unconstrained. Through the use of macro data in a microeconomic analysis, the logit probability model was employed to find the main determinants of the financial constraint probability of Brazilian firms. To examine the relationship between financial development, financial constraints and firm\'s investment decisions, it was estimated a version of the accelerator model of investment by the generalized method of moments (GMM) due to its dynamic character and the presence of the endogeneity problem. The main results indicate that, beyond factors associated with the firm\'s financial structure, factors such as the financial development level and the long-term interest rate have influence on the likelihood of firm\'s financial constraint. Measuring the dependence of firms on internal resources by the sensitivity of investment to cash flow, the results also showed that financial development is more important for firms which are considered financially constrained by the fact that a higher level of financial development reduces the dependence on internal resources of these firms, decreasing their level of financial constraint. Higher levels of financial development were also associated with higher rates of investment and with a better allocation of capital when considering firms identified as financially constrained. These results were robust even when controlled by the economic growth rate, by different financial development variables and when firms were classified by capital intensity and investment rate.

Há um intenso debate sobre o papel do crédito sobre o ciclo recente de expansão da economia brasileira. Esse trabalho pretende se inserir nesse debate ao testar resultados consagrados pela literatura empírica sobre as relações entre desenvolvimento financeiro e desenvolvimento econômico e social. Além disso, discute-se a questão de má alocação de recursos no que diz respeito ao crédito concedido com base em recursos direcionados (em geral, por bancos públicos e subsidiado) em relação ao crédito alocado por recursos livres. Os resultados sugerem maior eficiência alocativa do crédito livre em relação ao crédito direcionado. Por outro lado, também indicam um instrumento de políticas públicas que tem contribuído para a redução da desigualdade e da pobreza. Ainda assim, é importante a ressalva da inexistência de uma estimativa precisa de quanto a sociedade está alocando para essas políticas nem se esses recursos poderiam obter resultados mais eficientes se alocados em outros tipos de políticas. Esses resultados são sensíveis ao tamanho dos municípios medido pelo nível do PIB per capita, o que também sugere que uma dinâmica diferente do mercado de crédito e sua contribuição para o desenvolvimento. / There are a lot of discussions about the role of credit on the recent growth cycle of the Brazilian economy. This paper intends to be part of this debate by testing empirical results in the literature that relates financial development and social and economic development outcomes. In addition, it discusses the issue of misallocation of resources specially comparing the earmarked credit concession (usually lent by public banks and with government subsidies) to free market credit. The results indicate greater allocative efficiency of free credit in relation to earmarked credit. On the other hand, they suggest that the earmarked credit is an instrument of public policy that has contributed to reduce poverty and inequality. Even though, it is important to caveat the lack of an accurate estimate of how much the society is allocating to this policy and what type of results would be achieved allocating this resources to other policies with the same goals. These results are sensitive to the municipalities\' size measured by GDP per capita level. It suggests a different dynamic to the credit market and its contribution to development.

In this paper we empirically explore how characteristics of the domestic financial system influence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Specifically, we find that countries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the international diversification of consumption risk. We also find that countries with market-based financial systems manage to share a significantly larger fraction of their country-specific risk than bank-based economies. / Series: Department of Economics Working Paper Series