Government debt vs. financial depth dilemma in developing countries: The case of Turkey

İmre Ersoy ()
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İmre Ersoy: Marmara University European Union Institute, Department of European Union Economics, Göztepe Campus 347-22 Kadıköy, İstanbul, Turkey

Acta Oeconomica, 2012, vol. 62, issue 3, 345-362

Abstract: The aim of this paper is to investigate the impact of banks’ sovereign debt exposures on the financial development of Turkey. Results of the bounds test reveal a long-run and negative equilibrium relationship between banks’ domestic claims on sovereign and financial development, while Granger causality tests display a unidirectional causation from domestic debt to financial depth. Furthermore, stochastic frontier estimations provide evidence for the existence of cost inefficiency channel from government debt portfolios to financial development. The results suggest a need for more conscientious fiscal policy and country specific prudential regulation design for the financial development of Turkey.

Keywords: banks; financial markets; international lending and debt problems; economic growth; bounds test; Granger causality; cost efficiency; Turkey (search for similar items in EconPapers)
JEL-codes: C22 C33 F34 F43 G10 G21 (search for similar items in EconPapers)
Date: 2012
Note: The author gratefully acknowledges the comments received at the International Conference on “Global Trends in the Efficiency and Risk Management of Financial Services” organized by the Management School of Leicester University (14–15 November 2009) and is indebted to the invaluable comments of the two anonymous referees. Usual disclaimers hold.
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