The nexus of economic growth, trade openness and banking sector depth: An application of panel data analysis

The aim of this thesis is to examine the long and short term relationship between economic growth, trade openness and banking sector depth with panel data analysis in the countries where participation and conventional banking co-exist. In this context, the relationship between economic growth, trade openness and banking sector depth is examined using seventeen countries data in the Islamic Cooperation Organization, which includes both the participation and conventional banking. Time interval is determined as 1990-2016 period by considering accessibility of data and the accelaration participation banking development. As a result of econometric analysis, there is cross-sectional dependence between countries. Also, according to first and second generation unit root tests, series are not stationary. Since the series are not stationary, Westerlund (2007) cointegration analysis is performed to the series and it is determined that the series are cointegrated. Then, the models are estimated with three estimators by writing the panel as panel ARDL model to determine the long-term and short-term coefficients and relations. Results show that underdevelopment of banking sector has negative consequences for long-term economic growth. Also, the empirical results confirm the literature that positive effect of growth-openness relationship and provide similar evidence that does not change according to the model specification. In short, the findings of the link between the banking sector depth variables and economic growth are that the banking sector generally encourages long-term economic growth in these group of countries. For this reason, it can be stated that in these countries, a more competitive, efficient and stable banking sector may be able to increase the economic growth by encouraging deepening of the banking sector.