Title

Three essays on the relationship between the banking sector, the real sector, and the political environment

Semester

Spring

Date of Graduation

1999

Document Type

Dissertation

Degree Type

PhD

College

Chambers College of Business and Economics

Department

Economics

Committee Chair

Kern O. Kymn.

Abstract

Essay one. Does the banking sector affect the real sector? Does the real sector affect the banking sector? Do both sectors affect each other? This essay tries to answer these questions. The positive answer to the first question relates to the credit-view hypothesis that the quality and quantity of the banking sector or bank health affect aggregate economic performance.;Variance decomposition and the impulse-response function of the vector error correction model (VECM) estimates provide strong evidence that interdependence exists between these sectors in the U.S. for the period 1942--1996.;Thus, there are links between bank health, bank loans, and economic performance (i.e. the credit-view holds). The reverse links hold too, but with a lag.;Essay two. Do regional banking conditions or bank health (H) affect regional investment-oriented bank loans (IOBL) [H ⇒ IOBL]? Do regional investment-oriented bank loans (IOBL) then affect regional economic performance or income (Y) [IOBL ⇒ Y]? Alternatively, does the regional banking sector affect the regional real sector? This essay tries to answer these questions which are related to the credit-view hypothesis that the quality and quantity of the banking sector or bank health affect aggregate economic performance.;Since the appropriate estimators are 2SLS-KR (Keane and Runkle), FD (first-differenced)-2SLS, and FD (first-differenced)-2SLS-KR (Keane and Runkle), these dynamic pooled estimators were used in the regressions. The regression results support that there are links among regional bank health (H), IOBL, and economic performance (Y). Thus, regional banking sector conditions (H and IOBL) affect the regional real sector (Y). The regional credit-view (H ⇒ IOBL ⇒ Y) holds in this essay, which is consistent with Samolyk (1994).;Essay three. Does the political environment dynamically affect the costs of borrowing or the spread (the difference between the actual interest rate charged by the lender and the risk-free interest rate) in international lending markets? What determines the costs of borrowing or the spread?;By estimating the spread equation, in which the dependent variable is the spread and the explanatory variables are, for example, the lagged dependent spread variable (SPRit-1), the political environment (political instability index and democracy index), and other economic variables of each country, the answers can be obtained.;The estimates of dynamic pooled estimators [2SLS-KR (Keane and Runkle), FD (first-differenced)-2SLS, and FD (first differenced)-2SLS-KR (Keane and Runkle)] show that the political environment dynamically affects the cost of borrowing or the default spread---positively for political instability and negatively for democracy.

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