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.

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