The Spatial Structure of the Financial Development in Brazil

The purpose of this paper is to further explore the relationship between financial development and economic development. This is a widely discussed issue in studies that focus on cross-section analysis of countries or regions. However, few works shed light on the spatial interaction derived from the development of the financial system. This work focuses on the impacts of the development level of a municipality’s financial system over its neighborhood. Behind this discussion lies the concept of Central Place proposed by Christäller (1933). According to the author, the threshold of central goods and services, among them the financial services, would impede the offer of such goods and services in close locations. Using a GMM estimator for a spatial panel model with an endogenous spatial lag and spatial moving average errors we investigate the spatial structure of the financial system in Brazil. The yearly municipal data on financial assets for 1995-2007 is from a database compiled by the Laboratory of Studies in Money and Space (LEMTe) from CEDEPLAR/UFMG from data provided by the Brazilian Central Bank. The social variables are extracted from the Annual Relation of Social Variables (RAIS), a Brazilian census of formal firms and its employees. The results point to a negative spatial association between the Brazilian municipalities’ financial system, in the way that a municipality with more developed financial system tends to be surrounded by municipalities with less developed financial systems. This result indicates that the Central Place Theory may fit well to explain the spatial configuration of the Brazilian financial system.