THE EFFECTS OF FINANCIAL DEVELOPMENT ON INVESTMENT IN TURKEY

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.