FINANCIAL DEEPENING AND ECONOMIC GROWTH: A CASE OF TURKEY

Year 2019, Volume: 8 Issue: 1, 97 - 125, 01.08.2019

Kemal Erkişi , Turgay Ceyhan

Abstract

In this study, the relationship
between economic growth (EG) and financial deepening (FD) in Turkey was explored
by using the yearly data belongs to GDP, Bonds and domestic credits for
the period between 1994 – 2017.  “LSQ Method, Variance Inflation Factor Test,
Normality Histogram Test, Correlogram Q-Statistics Test and Heteroscedasticity Test” were employed and results indicated that the
variables and the model are significant. Granger causality analysis was
conducted to define the short-term causality among the variables. It is concluded: (a)
there is a positive bidirectional causality between economic growth and
domestic credit provided by financial sector, (b) there is a positive
unidirectional causality from bonds to economic growth and (c) there is not a
relationship between domestic credits and bonds. To investigate whether a
long-term relationship among the series, “Johansen Cointegration Test” was
employed. The results indicated that there is a long-term relationship between
the economic growth and financial development. By implementing “Variance
Decomposition Technique”, it is concluded that economic growth is explained by 67% GDP, 8% BONDS and by 23%
CREDIT.  The results of this research support the
Mutual Interaction Hypothesis that asserts a bidirectional relationship between
FD and EG and in this context, financial deepening has an important place in
terms of sustainable economic growth.

Keywords

Economic Growth, Financial Development, Var Granger Causality Analysis, , Johansen Cointegration Analysis.

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