THE EFFECTS OF FINANCIAL DEVELOPMENT ON INVESTMENT IN TURKEY

Abstract

Analyzing financial development and investment in Turkey between 1960 and 2008, this paper illustrates how financial development affects investment decisions in a dynamic model of the firm under financial frictions. A composite index is constructed of three alternative financial development measures. The bounds testing approach was used to test for the existence of long-run levels relationships and long-run levels relationships were estimated using the autoregressive distributed lag method. Both short-and long-run causality tests were performed. Results indicate that financial development, budget balance, and total credit to the private sector positively and significantly affect investment.