Demographic change and financial depth: The case of Turkey

Demographic change refers to the transformation of the population over time due to factors such as birth, death, age structure, and migration. The impact of this transformation on economic development and financial depth has been widely discussed in the literature. While young and working-age populations increase credit and investment demand, a rise in the dependent population may negatively affect financial depth. This study aims to analyze the relationship between demographic change and financial depth in Turkey for the period 1986-2023 using econometric methods. The relationships between financial depth and demographic as well as macroeconomic variables have been examined using annual data from the World Bank. Financial depth (FD) is considered the dependent variable, while the age dependency ratio (DD), deposit interest rate (FAIZ), and the ratio of foreign direct investment and portfolio investments to GDP (SA) are defined as independent variables. The stationarity levels of the series were examined using the Augmented Dickey-Fuller (ADF) and Fourier-based FADF unit root tests, while the cointegration relationship was investigated using the Fourier Autoregressive Distributed Lag (FADL) test. The Fully Modified Ordinary Least Squares (FMOLS) method was employed for long-term coefficient estimation, and the causal relationships between the variables were analyzed using the traditional Toda-Yamamoto (1995) and Fourier Toda-Yamamoto (2016) tests. The long-term estimation results indicate that all independent variables are negatively associated with financial depth. According to the results of the Toda-Yamamoto causality analysis, a unidirectional causal relationship was identified from the (DD) variable to the (FD) and (SA) variables. The results of the Fourier Toda-Yamamoto causality analysis indicate a unidirectional causality from the demographic change variable to the financial depth and interest rate variables, from the financial depth variable to the interest rate variable, and from the capital flow variable to the interest rate variable. Keywords: Demographic Change, Financial Depth, Age Dependency Ratio