The effects of the financial deepening on economic performance: The theory and the Turkish case

This thesis investigates the relationship between financial deepening and economic growth. In order to achive this goal, the theoretical considerations related to financial development?economic growth nexus have been reviewed. In this context, the studies fundamental for finance ?growth literature, the studies put forward by financial repression school and finally the studies considering financial development and economic growth relationship within the framework of endogenous growth theories have been investigated. Having been surveyed the theoretical works, the impact of both the stock markets and banks on economic growth are investigated by using a panel data set of 21 emerging economies for the period 1975-2004 and by applying generalized method of moments techniques developed for dynamic panels. The results of the econometric evidence reject the hypothesis that financial development is unrelated to growth and indicate that stock markets and banks positively influence economic growth. A noteworthy finding in parallel with the theory is that the impact of banks on growth is higher than stock markets?. As a final result of our thesis, the process of development and deepening of financial markets in Turkey are considered. In this context, whether the financial deepening is achieved in Turkey is analyzed. If it is achieved properly, whether the effects of the deepening reflected to economic growth as it is set up by theory are also investigated. The results show that financial deepening is achieved in Turkey in the period of financial liberalization. On the other hand the impact of financial deepening on growth does not reflect to the real sector of the economy due to the high fiscal dominance rates. These findings are confirmed by the cointegration analyses obtained from the dataset of Turkey related to 1987- 2006 period.Keywords: Financial Deepening, Economic Growth, Time Series Analyses, Panel Data Analyses