Abstract:

This study analyzes the relationship between financial development and economic growth for the period 1980-2016 in Turkey. There are many studies in the literature investigating the financial development growth interaction. However, in most of the previous studies, variables such as the ratio of loans provided to the private sector to GDP, the ratio of stock exchange capitalization to GDP, or M2 were used to represent financial development. However, these indicators do not consider the complex multidimensional nature of financial development. Unlike the earlier studies, the financial development index which is calculated by the International Monetary Fund (IMF) is used to represent financial development. The cointegration relationship between variables is examined by employing Engle-Granger (1987) and RALS-EG which is developed by Lee et al. (2015) cointegration tests. The results of the EG cointegration test denote that the variables are not cointegrated and the results of the RALS-EG test denote that the variables are cointegrated. Then long-term coefficients are estimated, and results indicate that financial development positively affects economic growth. Also, Granger (1969) causality test results indicate that financial development is the cause of economic growth. Thus, the findings show that the supply-leading hypothesis is valid in Turkey. This relationship between financial development and growth shows that policymakers need to make the necessary regulations to develop the banking sector and capital markets that will provide financial development to encourage growth. Having a deep and liquid market with different financial instruments will help countries increase their resilience to financial shocks and will also promote financial stability.

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